Fifth Third Bancorp 10Q 2023 Q2 Quarterly report

0000035527fitb:ClassActionSettlementMember2018-09-172018-09-17

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023

Commission File Number 001-33653

(Exact name of Registrant as specified in its charter)


Ohio						31-0854434
(State or other jurisdiction						(I.R.S. Employer
of incorporation or organization)						Identification Number)

38 Fountain Square Plaza

Cincinnati, Ohio 45263

(Address of principal executive offices)

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

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered:

Common Stock, Without Par Value

FITB

The

NASDAQ

Stock Market LLC

Depositary Shares Representing a 1/1000th Ownership Interest in a Share of

6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I

FITBI

The

NASDAQ

Stock Market LLC

Depositary Shares Representing a 1/40th Ownership Interest in a Share of

6.00% Non-Cumulative Perpetual Class B Preferred Stock, Series A

FITBP

The

NASDAQ

Stock Market LLC

Depositary Shares Representing a 1/1000th Ownership Interest in a Share of

4.95% Non-Cumulative Perpetual Preferred Stock, Series K

FITBO

The

NASDAQ

Stock Market LLC

There were 680,888,757 shares of the Registrant’s common stock, without par value, outstanding as of July 31, 2023.

Table of Contents

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Abbreviations and Acronyms			2
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)			3
Overview			3
Non-GAAP Financial Measures			8
Recent Accounting Standards			10
Critical Accounting Policies			10
Statements of Income Analysis			12
Balance Sheet Analysis			22
Business Segment Review			29
Risk Management—Overview			36
Credit Risk Management			36
Interest Rate and Price Risk Management			52
Liquidity Risk Management			57
Capital Management			59
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			62
Controls and Procedures (Item 4)			62
Condensed Consolidated Financial Statements and Notes (Item 1)			63
Balance Sheets (unaudited)			63
Statements of Income (unaudited)			64
Statements of Comprehensive Income (unaudited)			65
Statements of Changes in Equity (unaudited)			66
Statements of Cash Flows (unaudited)			68
Notes to Condensed Consolidated Financial Statements (unaudited)			69

Part II. Other Information
Legal Proceedings (Item 1)			140
Risk Factors (Item 1A)			140
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			140
Defaults Upon Senior Securities (Item 3)			140
Mine Safety Disclosures (Item 4)			140
Other Information (Item 5)			140
Exhibits (Item 6)			141
Signature			142

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. All statements other than statements of historical fact are forward-looking statements. These statements relate to our financial condition, results of operations, plans, objectives, future performance, capital actions or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) effects of the global COVID-19 pandemic; (2) deteriorating credit quality; (3) loan concentration by location or industry of borrowers or collateral; (4) problems encountered by other financial institutions; (5) inadequate sources of funding or liquidity; (6) unfavorable actions of rating agencies; (7) inability to maintain or grow deposits; (8) limitations on the ability to receive dividends from subsidiaries; (9) cyber-security risks; (10) Fifth Third’s ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (11) failures by third-party service providers; (12) inability to manage strategic initiatives and/or organizational changes; (13) inability to implement technology system enhancements; (14) failure of internal controls and other risk management systems; (15) losses related to fraud, theft, misappropriation or violence; (16) inability to attract and retain skilled personnel; (17) adverse impacts of government regulation; (18) governmental or regulatory changes or other actions; (19) failures to meet applicable capital requirements; (20) regulatory objections to Fifth Third’s capital plan; (21) regulation of Fifth Third’s derivatives activities; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) replacement of LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates and the effects of inflation; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of investments or acquired entities; (39) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate estimates; (42) weather-related events, other natural disasters, or health emergencies (including pandemics); (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity; (44) changes in law or requirements imposed by Fifth Third’s regulators impacting our capital actions, including dividend payments and stock repurchases; and (45) Fifth Third’s ability to meet its environmental and/or social targets, goals and commitments. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such statement is based, except as may be required by law, and we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The information contained herein is intended to be reviewed in its totality, and any stipulations, conditions or provisos that apply to a given piece of information in one part of this report should be read as applying mutatis mutandis to every other instance of such information appearing herein.

Table of Contents


PART I. FINANCIAL INFORMATION
Glossary of Abbreviations and Acronyms

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


ACL: Allowance for Credit Losses			FTS: Fifth Third Securities, Inc.
AFS: Available-For-Sale			GDP: Gross Domestic Product
ALCO: Asset Liability Management Committee			GNMA: Government National Mortgage Association
ALLL: Allowance for Loan and Lease Losses			HTM: Held-To-Maturity
AOCI: Accumulated Other Comprehensive Income (Loss)			IPO: Initial Public Offering
APR: Annual Percentage Rate			IRC: Internal Revenue Code
ARM: Adjustable Rate Mortgage			IRLC: Interest Rate Lock Commitment
ASC: Accounting Standards Codification			ISDA: International Swaps and Derivatives Association, Inc.
ASU: Accounting Standards Update			LIBOR: London Interbank Offered Rate
ATM: Automated Teller Machine			LIHTC: Low-Income Housing Tax Credit
BHC: Bank Holding Company			LLC: Limited Liability Company
BOLI: Bank Owned Life Insurance			LTV: Loan-to-Value Ratio
bps: Basis Points			MD&A: Management’s Discussion and Analysis of Financial
CD: Certificate of Deposit			Condition and Results of Operations
CDC: Fifth Third Community Development Corporation and Fifth Third			MSR: Mortgage Servicing Right
Community Development Company, LLC			N/A: Not Applicable
CECL: Current Expected Credit Loss			NII: Net Interest Income
CET1: Common Equity Tier 1			NM: Not Meaningful
CFPB: United States Consumer Financial Protection Bureau			OAS: Option-Adjusted Spread
CME: Chicago Mercantile Exchange			OCC: Office of the Comptroller of the Currency
C&I: Commercial and Industrial			OCI: Other Comprehensive Income (Loss)
DCF: Discounted Cash Flow			OREO: Other Real Estate Owned
DTCC: Depository Trust & Clearing Corporation			PPP: Paycheck Protection Program
DTI: Debt-to-Income Ratio			ROU: Right-of-Use
ERM: Enterprise Risk Management			SBA: Small Business Administration
ERMC: Enterprise Risk Management Committee			SEC: United States Securities and Exchange Commission
EVE: Economic Value of Equity			SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards Board			TBA: To Be Announced
FDIC: Federal Deposit Insurance Corporation			TDR: Troubled Debt Restructuring
FHA: Federal Housing Administration			TILA: Truth in Lending Act
FHLB: Federal Home Loan Bank			U.S.: United States of America
FHLMC: Federal Home Loan Mortgage Corporation			USD: United States Dollar
FICO: Fair Isaac Corporation (credit rating)			U.S. GAAP: United States Generally Accepted Accounting
FINRA: Financial Industry Regulatory Authority			Principles
FNMA: Federal National Mortgage Association			VA: United States Department of Veterans Affairs
FOMC: Federal Open Market Committee			VIE: Variable Interest Entity
FRB: Federal Reserve Bank			VRDN: Variable Rate Demand Note
FTE: Fully Taxable Equivalent
FTP: Funds Transfer Pricing


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

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

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2023, the Bancorp had $207 billion in assets and operated 1,072 full-service banking centers and 2,114 Fifth Third branded ATMs in eleven states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on three business segments: Commercial Banking, Consumer and Small Business Banking and Wealth and Asset Management.

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document as well as the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this Quarterly Report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and leases and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts. The FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended June 30, 2023, net interest income on an FTE basis and noninterest income provided 67% and 33% of total revenue, respectively. For the six months ended June 30, 2023, net interest income on an FTE basis and noninterest income provided 68% and 32% 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 Condensed Consolidated Financial Statements for the three and six months ended June 30, 2023. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section of MD&A, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

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

Noninterest income is derived from commercial banking revenue, wealth and asset management revenue, service charges on deposits, card and processing revenue, mortgage banking net revenue, leasing business revenue, other noninterest income and net securities gains or losses. Noninterest expense includes compensation and benefits, technology and communications, net occupancy expense, equipment expense, leasing business expense, marketing expense, card and processing expense and other noninterest expense.

Current Economic Conditions

Economic activity expanded in the second quarter of 2023. The labor market has remained strong and inflation has slowed. In response to persistent inflationary pressures, the FRB has raised benchmark interest rates several times since March 2022 and has signaled they will continue to monitor the cumulative economic effects of their policy actions, including tighter credit conditions for households and businesses, when determining future monetary actions. Amidst the rapid rate increases, several financial markets have experienced heightened volatility.

Changes in interest rates can affect numerous aspects of the Bancorp’s business and may impact the Bancorp’s future performance. If financial markets remain volatile, this may impact the future performance of various segments of the Bancorp’s business, including the value


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

of the Bancorp’s investment securities portfolio. The Bancorp continues to closely monitor the pace of inflation and the impacts of inflation on the broader market.

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility and have increased regulatory and market focus on the liquidity, asset-liability management and unrealized securities losses of banks. In May 2023, the FDIC proposed a special deposit insurance assessment on banking organizations with greater than $5 billion in assets to recover the costs associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. As proposed, the special assessment would be collected by the FDIC over an anticipated total of eight quarterly assessments beginning with the first quarter of 2024. The comment period for the proposed rule recently ended and the final rule is expected to be issued later in 2023. While the ultimate impact of the special assessment will be dependent on the final rule, the Bancorp has estimated that its special assessment under the provisions of the proposed rule would be approximately $208 million, which is expected to be recognized in earnings upon issuance of the final rule. The Bancorp continues to monitor regulatory changes related to these developments.

For further discussion on current economic conditions, refer to the Credit Risk Management subsection of the Risk Management section of MD&A. Additionally, refer to the Interest Rate and Price Risk Management and Liquidity Risk Management subsections of the Risk Management section of MD&A for additional information about the Bancorp’s interest rate risk management and liquidity risk management activities.

Accelerated Share Repurchase Transaction

During the first quarter of 2023, the Bancorp entered into and settled an accelerated share repurchase transaction. As part of the transaction, the Bancorp entered into a forward contract 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 agreement. Refer to Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information on share repurchase activity.

LIBOR Transition

In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA would 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.

On March 5, 2021, the FCA and ICE Benchmark Administration, Limited announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities would cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. In the United States, the Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened in 2014 to help ensure a successful transition away from USD LIBOR, identified SOFR as its preferred alternative rate. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The composition and characteristics of SOFR are not the same as those of LIBOR, and SOFR is fundamentally different from LIBOR for two key reasons: (1) SOFR is a secured rate, while LIBOR is an unsecured rate, and (2) SOFR is an overnight rate, while LIBOR is a forward-looking rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR, however calculated, will perform the same way as LIBOR would have at any time, including, as a result of changes in interest and yield rates in the market, market volatility, or global or regional economic, financial, political, regulatory, judicial or other events.

On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) into law. The LIBOR Act offers a federal solution for transitioning legacy instruments that lack sufficient provisions addressing LIBOR’s cessation by outlining a uniform process to govern the transition from LIBOR to a replacement rate. The LIBOR Act also establishes a safe harbor for lenders, shielding lenders from litigation as a result of their choice of a replacement rate (such as SOFR) per FRB recommendations. On December 16, 2022, the FRB issued its final regulations which carry out the terms of the LIBOR Act, which became effective on February 27, 2023. These regulations: (i) address the applicability of the LIBOR Act to various LIBOR contracts, (ii) identify the FRB-selected benchmark replacements for various types of LIBOR contracts, (iii) include certain benchmark replacement conforming changes, (iv) address the issue of preemption and (v) provide other clarifications, definitions and information.

In accordance with regulatory guidance, the Bancorp previously discontinued entering into new LIBOR-based contracts, except for permissible limited use, such as part of hedging and risk management programs. Additionally, the Bancorp has offered products which utilize alternative reference rates, including SOFR, since the fourth quarter of 2021. As of June 30, 2023, all remaining LIBOR-based exposures, including derivative contracts, loans, preferred stock and long-term debt, will transition to appropriate alternative reference rates at the time of the next repricing event. Refer to Note 15 and Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information about certain exposures which were transitioned to an alternative reference rate.

In the second quarter of 2023, as part of the LIBOR transition, certain central clearing parties converted existing LIBOR-based contracts into multiple replacement contracts: short-dated LIBOR contracts which continue through the next repricing event after the cessation of LIBOR


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

publication and SOFR contracts which are effective at the expiration of the short-dated contracts and continue through the maturity of the original contracts. Each set of replacement contracts is designed to cover the same period of time as the original LIBOR-based contract. As a result of this approach, the conversion resulted in a temporary increase in notional balances when compared to the former LIBOR-based contracts cleared through certain central clearing parties. The Bancorp’s notional balances increased by approximately $12.5 billion for cash flow hedges, $18.0 billion for interest rate contracts for collateral management and $18.0 billion for interest rate contracts for customer accommodation. The temporary increase in notional amounts due to the replacement contracts is expected to end in the third quarter of 2023.

For a further discussion of the various risks the Bancorp faces in connection with the 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 the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

Key Performance Indicators

The Bancorp, as a banking institution, utilizes various key indicators of financial condition and operating results in managing and monitoring the performance of the business. In addition to traditional financial metrics, such as revenue and expense trends, the Bancorp monitors other financial measures that assist in evaluating growth trends, capital strength and operational efficiencies. The Bancorp analyzes these key performance indicators against its past performance, its forecasted performance and with the performance of its peer banking institutions. These indicators may change from time to time as the operating environment and businesses change.

The following are some of the key indicators used by management to assess the Bancorp’s business performance, including those which are considered in the Bancorp’s compensation programs:

•CET1 Capital Ratio: CET1 capital divided by risk-weighted assets as defined by the Basel III standardized approach to risk-weighting of assets

•Return on Average Tangible Common Equity (non-GAAP): Tangible net income available to common shareholders divided by average tangible common equity

•Return on Average Common Equity, Excluding AOCI (non-GAAP): Net income available to common shareholders divided by total equity, excluding AOCI and preferred stock

•Net Interest Margin (non-GAAP): Net interest income on an FTE basis divided by average interest-earning assets

•Efficiency Ratio (non-GAAP): Noninterest expense divided by the sum of net interest income on an FTE basis and noninterest income

•Earnings Per Share, Diluted: Net income allocated to common shareholders divided by average common shares outstanding after the effect of dilutive stock-based awards

•Nonperforming Portfolio Assets Ratio: Nonperforming portfolio assets divided by portfolio loans and leases and OREO

•Net Charge-off Ratio: Net losses charged-off divided by average portfolio loans and leases

•Return on Average Assets: Net income divided by average assets

•Loan-to-Deposit Ratio: Total loans divided by total deposits

•Household Growth: Change in the number of consumer households with retail relationship-based checking accounts

The list of indicators above is intended to summarize some of the most important metrics utilized by management in evaluating the Bancorp’s performance and does not represent an all-inclusive list of all performance measures that may be considered relevant or important to management or investors.


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


TABLE 1: Earnings Summary
	For the three months ended June 30,				%	For the six months ended June 30,				%
($ in millions, except for per share data)	2023			2022	Change	2023			2022	Change
Income Statement Data
Net interest income (U.S. GAAP)	$	1,457		1,339	9	$	2,974		2,534	17
Net interest income (FTE)(a)(b)	1,463			1,342	9	2,985			2,541	17
Noninterest income	726			676	7	1,422			1,359	5
Total revenue (FTE)(a)(b)	2,189			2,018	8	4,407			3,900	13
Provision for credit losses	177			179	(1)	341			224	52
Noninterest expense	1,231			1,112	11	2,562			2,334	10
Net income	601			562	7	1,159			1,056	10
Net income available to common shareholders	562			526	7	1,097			1,000	10
Common Share Data
Earnings per share - basic	$	0.82		0.76	8	$	1.60		1.45	10
Earnings per share - diluted	0.82			0.76	8	1.59			1.44	10
Cash dividends declared per common share	0.33			0.30	10	0.66			0.60	10
Book value per share	23.05			24.56	(6)	23.05			24.56	(6)
Market value per share	26.21			33.60	(22)	26.21			33.60	(22)
Financial Ratios
Return on average assets	1.17		%	1.09	7	1.14		%	1.03	11
Return on average common equity	13.9			12.3	13	13.8			11.1	24
Return on average tangible common equity(b)	20.5			17.5	17	20.5			15.3	34
Dividend payout	40.2			39.5	2	41.3			41.4	—

(a)Amounts presented on an FTE basis. The FTE adjustments were $6 and $3 for the three months ended June 30, 2023 and 2022, respectively, and $11 and $7 for the six months ended June 30, 2023 and 2022, respectively.

(b)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 second quarter of 2023 was $562 million, or $0.82 per diluted share, which was net of $39 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter of 2022 was $526 million, or $0.76 per diluted share, which was net of $36 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2023 was $1.1 billion, or $1.59 per diluted share, which was net of $62 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2022 was $1.0 billion, or $1.44 per diluted share, which was net of $56 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $1.5 billion for the three months ended June 30, 2023, an increase of $121 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields on average loans and leases, average other short-term investments and average taxable securities for the three months ended June 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other consumer loans, average commercial and industrial loans and average taxable securities for the three months ended June 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits, average long-term debt and average balances of FHLB advances as well as decreases in the average balances of demand deposits and increases in the average balances of CDs over $250,000 and FHLB advances for the three months ended June 30, 2023 compared to the same period in the prior year. Net interest margin on an FTE basis (non-GAAP) was 3.10% for the three months ended June 30, 2023 compared to 2.92% for the same period in the prior year.

Net interest income on an FTE basis (non-GAAP) was $3.0 billion for the six months ended June 30, 2023, an increase of $444 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields on average loans and leases, average other short-term investments and average taxable securities for the six months ended June 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average taxable securities, average other consumer loans and average commercial and industrial loans for the six months ended June 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits, average long-term debt and average FHLB advances as well as increases in the average balances of CDs over $250,000, FHLB advances and long-term debt for the six months ended June 30, 2023 compared to the same period in the prior year. Additionally, interest income recognized from PPP loans decreased to $2 million for the six months ended June 30, 2023 compared to $32 million for the same period in the prior year. Net interest margin on an FTE basis (non-GAAP) was 3.20% for the six months ended June 30, 2023 compared to 2.75% for the same period in the prior year.


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

The provision for credit losses was $177 million and $341 million for the three and six months ended June 30, 2023, respectively, compared to $179 million and $224 million during the same periods in the prior year. Provision expense for the three months ended June 30, 2023 was driven by factors that caused an increase in the ACL from March 31, 2023 which included deterioration in the economic forecast and increases to specific reserves on individually evaluated commercial and industrial loans, partially offset by lower period-end loan and lease balances. Provision expense for the six months ended June 30, 2023 was driven by factors that caused an increase in the ACL from December 31, 2022 which included the impact of higher period-end loan and lease balances and increases to specific reserves on individually evaluated commercial and industrial loans. The increase in period-end loan and lease balances for the six months ended June 30, 2023 was primarily driven by originations of point-of-sale solar energy installation loans. The provision for credit losses for both the three and six months ended June 30, 2022 also included the initial recognition of provision expense on loans acquired as part of a business combination completed in the second quarter of 2022. Net losses charged off as a percent of average portfolio loans and leases were 0.29% and 0.21% for the three months ended June 30, 2023 and 2022, respectively, and 0.27% and 0.17% for the six months ended June 30, 2023 and 2022, respectively. At June 30, 2023 and December 31, 2022, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.54% and 0.44%, respectively. For further discussion on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Condensed Consolidated Financial Statements.

Noninterest income increased $50 million and $63 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in net securities gains, mortgage banking net revenue and commercial banking revenue, partially offset by decreases in other noninterest income, service charges on deposits and leasing business revenue.

Noninterest expense increased $119 million and $228 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in compensation and benefits expense, other noninterest expense, technology and communications expense, net occupancy expense and marketing expense.

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

Capital Summary

The Bancorp calculated its regulatory capital ratios under the Basel III standardized approach to risk-weighting of assets and pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital as of June 30, 2023. As of June 30, 2023, the Bancorp’s capital ratios, as defined by the U.S. banking agencies, were:

•CET1 capital ratio: 9.49%;

•Tier 1 risk-based capital ratio: 10.73%;

•Total risk-based capital ratio: 12.83%;

•Leverage ratio: 8.81%.


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

NON-GAAP FINANCIAL MEASURES

The following are non-GAAP financial measures which provide useful insight to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures. The Bancorp encourages readers to consider the Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

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

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


TABLE 2: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis
	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2023			2022	2023	2022
Net interest income (U.S. GAAP)	$	1,457		1,339	2,974	2,534
Add: FTE adjustment	6			3	11	7
Net interest income on an FTE basis (1)	$	1,463		1,342	2,985	2,541
Net interest income on an FTE basis (annualized) (2)	5,868			5,383	6,019	5,124

Interest income (U.S. GAAP)	$	2,370		1,464	4,583	2,752
Add: FTE adjustment	6			3	11	7
Interest income on an FTE basis	$	2,376		1,467	4,594	2,759
Interest income on an FTE basis (annualized) (3)	9,530			5,884	9,264	5,564

Interest expense (annualized) (4)	$	3,662		501	3,245	440
Noninterest income (5)	726			676	1,422	1,359
Noninterest expense (6)	1,231			1,112	2,562	2,334
Average interest-earning assets (7)	189,060			184,406	188,238	186,139
Average interest-bearing liabilities (8)	134,590			115,462	131,950	116,109

Ratios:
Net interest margin on an FTE basis (2) / (7)	3.10		%	2.92	3.20	2.75
Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8))	2.32			2.76	2.46	2.61
Efficiency ratio on an FTE basis (6) / ((1) + (5))	56.2			55.1	58.1	59.8

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.


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

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


TABLE 3: Non-GAAP Financial Measures - Return on Average Tangible Common Equity
	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2023			2022	2023	2022
Net income available to common shareholders (U.S. GAAP)	$	562		526	1,097	1,000
Add: Intangible amortization, net of tax	8			9	18	17
Tangible net income available to common shareholders	$	570		535	1,115	1,017
Tangible net income available to common shareholders (annualized) (1)	2,286			2,146	2,248	2,051

Average Bancorp shareholders’ equity (U.S. GAAP)	$	18,344		19,248	18,162	20,319
Less: Average preferred stock	2,116			2,116	2,116	2,116
Average goodwill	4,919			4,744	4,917	4,630
Average intangible assets	152			158	157	154
Average tangible common equity (2)	$	11,157		12,230	10,972	13,419

Return on average tangible common equity (1) / (2)	20.5		%	17.5	20.5	15.3

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


TABLE 4: Non-GAAP Financial Measures - Capital Ratios
As of ($ in millions)	June 30, 2023			December 31, 2022
Total Bancorp Shareholders’ Equity (U.S. GAAP)	$	17,809		17,327
Less: Preferred stock	2,116			2,116
Goodwill	4,919			4,915
Intangible assets	146			169
AOCI	(5,166)			(5,110)
Tangible common equity, excluding AOCI (1)	$	15,794		15,237
Add: Preferred stock	2,116			2,116
Tangible equity (2)	$	17,910		17,353

Total Assets (U.S. GAAP)	$	207,276		207,452
Less: Goodwill	4,919			4,915
Intangible assets	146			169
AOCI, before tax	(6,539)			(6,468)
Tangible assets, excluding AOCI (3)	$	208,750		208,836

Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)	8.58		%	8.31
Tangible common equity as a percentage of tangible assets (1) / (3)	7.57			7.30


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

RECENT ACCOUNTING STANDARDS

Note 3 of the Notes to Condensed Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the 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. These accounting policies are discussed in detail in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

As further discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements, on January 1, 2023, the Bancorp adopted ASU 2022-02 (“Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”). In conjunction with the adoption of this amended guidance, the Bancorp has revised its Critical Accounting Policies for the ALLL as described below. Refer to the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for discussion on the accounting policy for the ALLL for periods prior to January 1, 2023. There have been no other material changes to the valuation techniques or models during the six months ended June 30, 2023.

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 6 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp maintains the ALLL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans and leases. Contractual terms are adjusted for expected prepayments but are not extended for expected extensions, renewals or modifications except in circumstances where extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bancorp. Accrued interest receivable on loans is presented in the Condensed Consolidated Financial Statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. The Bancorp follows established policies for placing loans on nonaccrual status, so uncollectible accrued interest receivable is reversed in a timely manner. As a result, the Bancorp has elected not to measure a reserve for accrued interest receivable as part of its ALLL. However, the Bancorp does record a reserve for the portion of accrued interest receivable that it expects to be uncollectible. For additional information on the Bancorp’s accounting policies related to nonaccrual loans and leases, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.

Credit losses are charged and recoveries are credited to the ALLL. 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 of loans and leases, including historical credit loss experience, current and forecasted market and economic conditions and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ALLL to the Bancorp’s current estimate of expected credit losses on portfolio loans and leases. 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. Refer to the Credit Risk Management section of MD&A for additional information.

The Bancorp’s methodology for determining the ALLL requires significant management judgment and includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated.

Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million on nonaccrual status are individually evaluated for an ALLL. 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 (including modifications, if any) and other factors when determining the amount of the ALLL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, 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. Significant management judgment is required when evaluating which of these factors are most relevant in individual circumstances, and when estimating the amount of expected credit losses based on those factors. When loans and leases are individually evaluated, 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 individually evaluated loans and leases that are collateral-dependent are measured based on the fair


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

value of the underlying collateral, less expected costs to sell where applicable. Individually evaluated loans and leases that are not collateral-dependent are measured based on the observable market value of the loan or lease or the present value of expected cash flows, discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans and leases are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

The Bancorp considers loans to be collateral-dependent when it becomes probable that repayment of the loan will be provided through the sale or operation of the collateral instead of from payments made by the borrower. The expected credit losses for these loans are typically estimated based on the fair value of the underlying collateral, less expected costs to sell where applicable. Specific allowances on individually evaluated consumer and residential mortgage loans are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Expected credit losses are estimated on a collective basis for loans and leases that are not individually evaluated. For collectively evaluated loans and leases, the Bancorp uses models to forecast expected credit losses based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. The estimate of the expected balance at the time of default considers prepayments and, for loans with available credit, expected utilization rates. The Bancorp’s expected credit loss models were developed based on historical credit loss experience and observations of migration patterns for various credit risk characteristics (such as internal credit risk ratings, external credit ratings or scores, delinquency status, loan-to-value trends, etc.) over time, with those observations evaluated in the context of concurrent macroeconomic conditions. The Bancorp developed its models from historical observations capturing a full economic cycle when possible.

The Bancorp’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, the Bancorp considers its forecasts to be reasonable and supportable for a period of up to three years from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information without adjustment for changes in economic conditions. This reversion is phased in over a two-year period. The Bancorp evaluates the length of its reasonable and supportable forecast period, its reversion period and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.

The Bancorp also considers qualitative factors in determining the ALLL. These considerations inherently require significant management judgment to determine the appropriate factors to be considered and the extent of their impact on the ALLL estimate. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but that are not fully captured within the Bancorp’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on the Bancorp’s customers.

Overall, the collective evaluation process requires significant management judgment when determining the estimation methodology and inputs into the models, as well as in evaluating the reasonableness of the modeled results and the appropriateness of qualitative adjustments. The Bancorp’s forecasts of market and economic conditions and the internal risk ratings assigned to loans and leases in the commercial portfolio segment are examples of inputs to the expected credit loss models that require significant management judgment. These inputs have the potential to drive significant variability in the resulting ALLL.

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.


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

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

Net interest income is the interest earned on loans and leases (including yield-related fees), securities and other short-term investments less the interest incurred on core deposits and wholesale funding. 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 5 and 6 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2023 and 2022, 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 $1.5 billion for the three months ended June 30, 2023, an increase of $121 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields of 233 bps on average loans and leases, 464 bps on average other short-term investments and 34 bps on average taxable securities for the three months ended June 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average other consumer loans, average commercial and industrial loans and average taxable securities of $2.9 billion, $2.7 billion and $2.3 billion, respectively, for the three months ended June 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits of 210 bps, average long-term debt of 203 bps and average FHLB advances of 382 bps as well as decreases in the average balances of demand deposits of $16.0 billion, increases in the average balances of CDs over $250,000 of $4.7 billion and increases in the average balances of FHLB advances of $3.8 billion for the three months ended June 30, 2023 compared to the same period in the prior year.

Net interest income on an FTE basis (non-GAAP) was $3.0 billion for the six months ended June 30, 2023, an increase of $444 million compared to the same period in the prior year. Net interest income benefited from increases in market interest rates, resulting in increases in yields of 227 bps on average loans and leases, 472 bps on average other short-term investments and 30 bps on average taxable securities for the six months ended June 30, 2023 compared to the same period in the prior year. Net interest income also benefited from increases in average taxable securities, average other consumer loans and average commercial and industrial loans of $9.0 billion, $2.8 billion and $4.2 billion, respectively, for the six months ended June 30, 2023 compared to the same period in the prior year. These positive impacts were partially offset by increases in rates paid on average interest-bearing core deposits of 186 bps, average long-term debt of 185 bps and average FHLB advances of 349 bps as well as decreases in the average balances of demand deposits of $14.8 billion and increases in the average balances of CDs over $250,000 of $4.4 billion, FHLB advances of $4.3 billion and long-term debt of $2.0 billion for the six months ended June 30, 2023 compared to the same period in the prior year. Additionally, interest income recognized from PPP loans decreased to $2 million for the six months ended June 30, 2023 compared to $32 million for the same period in the prior year.

Net interest rate spread on an FTE basis (non-GAAP) was 2.32% and 2.46% during the three and six months ended June 30, 2023, respectively, compared to 2.76% and 2.61% in the same periods in the prior year. Rates paid on average interest-bearing liabilities increased 229 bps and 208 bps, partially offset by increases in yields on average interest-earning assets of 185 bps and 193 bps for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

Net interest margin on an FTE basis (non-GAAP) was 3.10% and 3.20% for the three and six months ended June 30, 2023, respectively, compared to 2.92% and 2.75% for the comparable periods in the prior year. Net interest margin for the three and six months ended June 30, 2023 was positively impacted by the net benefit of higher market interest rates, growth in average commercial and industrial loan balances and average investment portfolio balances, and a decline in other short-term investments, partially offset by the migration of average balances of deposits from demand accounts to interest-bearing accounts and increases in rates paid on and balances of average wholesale funding. Net interest margin results are expected to stabilize or decrease modestly as the repricing of the Bancorp’s asset portfolios into higher rates are more than offset by the impact of rising rates on deposits and other interest-bearing liabilities.

Interest income on an FTE basis (non-GAAP) from loans and leases increased $751 million and $1.5 billion during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, driven by the previously mentioned increases in market interest rates and average balances of other consumer loans and commercial and industrial loans. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income on an FTE basis (non-GAAP) from investment securities and other short-term investments increased $158 million and $350 million during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily due to the previously mentioned increases in yields on average other short-term investments as well as increases in yields on and balances of average taxable securities. The increase for the six months ended June 30, 2023 was partially offset by a decrease in average other short-term investments of $12.4 billion from the same period in the prior year.


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

Interest expense on average core deposits increased $571 million and $994 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily due to the previously mentioned increases in the cost of average interest-bearing core deposits to 219 bps and 193 bps for the three and six months ended June 30, 2023, respectively, from 9 bps and 7 bps for the three and six months ended June 30, 2022, respectively, as a result of increasing short-term interest rates. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding increased $217 million and $397 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily due to the previously mentioned increases in rates paid on average long-term debt and FHLB advances as well as increases in the average balances of CDs over $250,000, FHLB advances and long-term debt. 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 19% of average interest-bearing liabilities during both the three and six months ended June 30, 2023, compared to 14% and 12% for the three and six months ended June 30, 2022, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Interest Rate and Price Risk Management subsection of the Risk Management section of MD&A.


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


TABLE 5: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the three months ended	June 30, 2023						June 30, 2022						Attribution of Change in Net Interest Income(a)
($ in millions)	Average Balance		Interest Earned/Paid		Average Yield/ Rate		Average Balance		Interest Earned/Paid		Average Yield/ Rate		Volume		Yield/ Rate	Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans	$	58,152	982		6.78	%	$	55,466	497		3.59	%	$	25	460	485
Commercial mortgage loans	11,374		168		5.92		10,710		89		3.34		6		73	79
Commercial construction loans	5,535		94		6.80		5,356		49		3.69		2		43	45
Commercial leases	2,703		24		3.54		2,840		21		2.93		(1)		4	3
Total commercial loans and leases	$	77,764	1,268		6.54		$	74,372	656		3.54		$	32	580	612
Residential mortgage loans	18,158		153		3.39		19,899		155		3.12		(14)		12	(2)
Home equity	3,937		72		7.39		3,895		37		3.81		—		35	35
Indirect secured consumer loans	16,281		170		4.19		17,241		136		3.17		(8)		42	34
Credit card	1,783		62		13.93		1,704		52		12.29		3		7	10
Other consumer loans	6,064		109		7.21		3,125		47		5.99		51		11	62
Total consumer loans	$	46,223	566		4.92		$	45,864	427		3.73		$	32	107	139
Total loans and leases	$	123,987	1,834		5.94	%	$	120,236	1,083		3.61	%	$	64	687	751
Securities:
Taxable	55,771		428		3.07		53,475		363		2.73		17		48	65
Exempt from income taxes(b)	1,496		12		3.19		1,063		7		2.47		3		2	5
Other short-term investments	7,806		102		5.24		9,632		14		0.60		(3)		91	88
Total interest-earning assets	$	189,060	2,376		5.04	%	$	184,406	1,467		3.19	%	$	81	828	909
Cash and due from banks	2,622						3,118
Other assets	16,613						20,282
Allowance for loan and lease losses	(2,216)						(1,909)
Total assets	$	206,079					$	205,897
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	50,472	354		2.81	%	$	44,349	17		0.15	%	$	3	334	337
Savings deposits	21,675		39		0.72		23,708		2		0.03		—		37	37
Money market deposits	28,913		134		1.86		29,284		4		0.06		—		130	130
Foreign office deposits	143		—		1.25		139		—		0.13		—		—	—
CDs $250,000 or less	7,759		67		3.48		2,193		—		0.09		4		63	67
Total interest-bearing core deposits	$	108,962	594		2.19		$	99,673	23		0.09		$	7	564	571
CDs over $250,000	5,375		61		4.53		662		2		1.08		41		18	59

Federal funds purchased	376		5		5.11		392		1		0.82		—		4	4
Securities sold under repurchase agreements	361		1		1.17		488		—		0.08		—		1	1
FHLB advances	6,589		86		5.23		2,743		9		1.41		26		51	77
Derivative collateral and other borrowed money	79		3		15.07		340		3		3.12		(3)		3	—
Long-term debt	12,848		163		5.12		11,164		87		3.09		14		62	76
Total interest-bearing liabilities	$	134,590	913		2.72	%	$	115,462	125		0.43	%	$	85	703	788
Demand deposits	46,520						62,555
Other liabilities	6,625						8,632
Total liabilities	$	187,735					$	186,649
Total equity	$	18,344					$	19,248
Total liabilities and equity	$	206,079					$	205,897
Net interest income (FTE)(c)			$	1,463					$	1,342			$	(4)	125	121
Net interest margin (FTE)(c)					3.10	%					2.92	%
Net interest rate spread (FTE)(c)					2.32						2.76
Interest-bearing liabilities to interest-earning assets					71.19						62.61

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

(b)The FTE adjustments included in the above table were $6 and $3 for the three months ended June 30, 2023 and 2022, respectively.

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


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


TABLE 6: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the six months ended	June 30, 2023						June 30, 2022						Attribution of Change in Net Interest Income(a)
($ in millions)	Average Balance		Interest Earned/Paid		Average Yield/ Rate		Average Balance		Interest Earned/Paid		Average Yield/ Rate		Volume		Yield/ Rate	Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans	$	58,178	1,902		6.59	%	$	54,022	923		3.45	%	$	76	903	979
Commercial mortgage loans	11,248		320		5.74		10,620		167		3.17		10		143	153
Commercial construction loans	5,521		182		6.65		5,364		93		3.49		3		86	89
Commercial leases	2,683		47		3.51		2,891		41		2.89		(3)		9	6
Total commercial loans and leases	$	77,630	2,451		6.37		$	72,897	1,224		3.39		$	86	1,141	1,227
Residential mortgage loans	18,243		306		3.39		20,037		313		3.15		(30)		23	(7)
Home equity	3,971		136		6.93		3,952		72		3.66		0		64	64
Indirect secured consumer loans	16,439		332		4.07		17,189		266		3.13		(12)		78	66
Credit card	1,781		124		14.04		1,698		103		12.30		6		15	21
Other consumer loans	5,738		202		7.09		2,935		88		6.03		96		18	114
Total consumer loans	$	46,172	1,100		4.81		$	45,811	842		3.71		$	60	198	258
Total loans and leases	$	123,802	3,551		5.78	%	$	118,708	2,066		3.51	%	$	146	1,339	1,485
Securities:
Taxable	56,437		858		3.07		47,476		653		2.77		131		74	205
Exempt from income taxes(b)	1,450		23		3.15		1,036		13		2.43		6		4	10
Other short-term investments	6,549		162		5.00		18,919		27		0.28		(29)		164	135
Total interest-earning assets	$	188,238	4,594		4.92	%	$	186,139	2,759		2.99	%	$	254	1,581	1,835
Cash and due from banks	2,878						3,040
Other assets	16,649						20,237
Allowance for loan and lease losses	(2,181)						(1,901)
Total assets	$	205,584					$	207,515
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	49,599	635		2.58	%	$	46,492	23		0.10	%	$	2	610	612
Savings deposits	22,387		73		0.65		23,242		3		0.02		—		70	70
Money market deposits	28,668		218		1.53		29,771		7		0.05		—		211	211
Foreign office deposits	143		1		1.57		132		—		0.09		—		1	1
CDs $250,000 or less	6,473		101		3.15		2,284		1		0.10		6		94	100
Total interest-bearing core deposits	$	107,270	1,028		1.93		$	101,921	34		0.07		$	8	986	994
CDs over $250,000	4,865		105		4.36		459		2		1.02		77		26	103

Federal funds purchased	431		10		4.79		326		1		0.56		—		9	9
Securities sold under repurchase agreements	344		2		0.96		489		—		0.05		—		2	2
FHLB advances	5,701		138		4.90		1,379		10		1.41		72		56	128
Derivative collateral and other borrowed money	161		7		8.14		370		3		1.61		(2)		6	4
Long-term debt	13,178		319		4.90		11,165		168		3.05		35		116	151
Total interest-bearing liabilities	$	131,950	1,609		2.46	%	$	116,109	218		0.38	%	$	190	1,201	1,391
Demand deposits	48,617						63,379
Other liabilities	6,855						7,708
Total liabilities	$	187,422					$	187,196
Total equity	$	18,162					$	20,319
Total liabilities and equity	$	205,584					$	207,515
Net interest income (FTE)(c)			$	2,985					$	2,541			$	64	380	444
Net interest margin (FTE)(c)					3.20	%					2.75	%
Net interest rate spread (FTE)(c)					2.46						2.61
Interest-bearing liabilities to interest-earning assets					70.10						62.38

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

(b)The FTE adjustments included in the above table were $11 and $7 for the six months ended June 30, 2023 and 2022, respectively.

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


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

Provision for Credit Losses

The Bancorp provides, as an expense, an amount for expected credit losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of MD&A. For a discussion of the factors used to determine the amount provided, as an expense, for expected credit losses within the portfolio of unfunded commitments, refer to the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022. The provision is recorded to bring the ALLL and reserve for unfunded commitments to a level deemed appropriate by the Bancorp to cover losses expected in the portfolios. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans and leases actually removed from the Condensed Consolidated Balance Sheets are referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

The ALLL increased $133 million from December 31, 2022 to $2.3 billion at June 30, 2023 inclusive of a $49 million reduction from the impact of the adoption of ASU 2022-02 on January 1, 2023, as further discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements. At June 30, 2023, the ALLL as a percent of portfolio loans and leases increased to 1.91%, compared to 1.81% at December 31, 2022. The reserve for unfunded commitments decreased $9 million from December 31, 2022 to $207 million at June 30, 2023. At June 30, 2023, the ACL as a percent of portfolio loans and leases increased to 2.08%, compared to 1.98% at December 31, 2022.

Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 6 of the Notes to Condensed 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 and determining the level of the ACL.

Noninterest Income

Noninterest income increased $50 million and $63 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

The following table presents the components of noninterest income:


TABLE 7: Components of Noninterest Income
	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2023		2022	% Change	2023		2022	% Change
Commercial banking revenue	$	146	137	7	$	307	272	13
Wealth and asset management revenue	143		140	2	289		289	—
Service charges on deposits	144		154	(6)	281		306	(8)
Card and processing revenue	106		105	1	206		201	2
Mortgage banking net revenue	59		31	90	127		83	53
Leasing business revenue	47		56	(16)	104		118	(12)
Other noninterest income	74		85	(13)	97		138	(30)
Securities gains (losses), net	7		(32)	NM	11		(47)	NM
Securities losses, net – non-qualifying hedges on mortgage servicing rights	—		—	NM	—		(1)	(100)
Total noninterest income	$	726	676	7	$	1,422	1,359	5

Commercial banking revenue

Commercial banking revenue increased $9 million and $35 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily driven by increases in loan syndication fees, bridge fees and foreign exchange fees, partially offset by a decrease in merger and acquisition fees. The increase for the three months ended June 30, 2023 also included an increase in contract revenue from commercial customer derivatives.


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

Wealth and asset management revenue

Wealth and asset management revenue increased $3 million for the three months ended June 30, 2023 and was flat for the six months ended June 30, 2023 compared to the same periods in the prior year. The increase for the three months ended June 30, 2023 was primarily driven by an increase in private client service fees. The Bancorp’s trust and registered investment advisory businesses had approximately $554 billion and $512 billion in total assets under care as of June 30, 2023 and 2022, respectively, and managed $59 billion and $54 billion in assets for individuals, corporations and not-for-profit organizations as of June 30, 2023 and 2022, respectively.

Service charges on deposits

Service charges on deposits decreased $10 million and $25 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 due to a decrease in service charges on both commercial and consumer deposits. Service charges on commercial deposits were $105 million and $205 million for the three and six months ended June 30, 2023, respectively, a decrease of $8 million and $21 million from the same periods in the prior year, primarily due to higher treasury management earnings credits driven by market interest rates, partially offset by an increase in commercial treasury management fees. Service charges on consumer deposits were $39 million and $76 million for the three and six months ended June 30, 2023, respectively, a decrease of $2 million and $4 million from the same periods in the prior year, primarily due to a decrease in consumer deposit fees driven by the elimination of non-sufficient funds fees during the third quarter of 2022.

Card and processing revenue

Card and processing revenue increased $1 million and $5 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily due to increases in debit and commercial card interchange, driven by higher spend volumes. These increases were partially offset by increased reward costs.

Mortgage banking net revenue

Mortgage banking net revenue increased $28 million and $44 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022.

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


TABLE 8: Components of Mortgage Banking Net Revenue
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Origination fees and gains on loan sales	$	22	23	41	49
Net mortgage servicing revenue:
Gross mortgage servicing fees	80		81	161	149
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs	(43)		(73)	(75)	(115)
Net mortgage servicing revenue	37		8	86	34
Total mortgage banking net revenue	$	59	31	127	83

Origination fees and gains on loan sales decreased $1 million and $8 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, primarily driven by lower volumes of residential mortgage loan originations. Residential mortgage loan originations decreased to $1.7 billion and $3.1 billion for the three and six months ended June 30, 2023, respectively, from $4.3 billion and $7.8 billion for the three and six months ended June 30, 2022, respectively, primarily due to the impact of higher market interest rates on refinance activity.


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

The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the Bancorp’s non-qualifying hedging strategy:


TABLE 9: Components of Net Valuation Adjustments on MSRs
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$	(56)	(103)	(35)	(284)
Changes in fair value:
Due to changes in inputs or assumptions(a)	53		84	34	275
Other changes in fair value(b)	(40)		(54)	(74)	(106)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs	$	(43)	(73)	(75)	(115)

(a)Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.

(b)Primarily reflects changes due to realized cash flows and the passage of time.

The Bancorp recognized income of $13 million and losses of $40 million for the three and six months ended June 30, 2023, respectively, and income of $30 million and $169 million for the three and six months ended June 30, 2022, respectively, in mortgage banking net revenue for valuation adjustments on the MSR portfolio. The valuation adjustments on the MSR portfolio included increases of $53 million and $34 million for the three and six months ended June 30, 2023, respectively, and increases of $84 million and $275 million for the three and six months ended June 30, 2022, respectively, due to changes in market rates and other inputs in the valuation model, including future prepayment speeds and OAS assumptions. Mortgage rates increased during the three and six months ended June 30, 2023, which caused a decrease in modeled prepayment speeds. The fair value of the MSR portfolio decreased $40 million and $74 million for the three and six months ended June 30, 2023, respectively, and decreased $54 million and $106 million for the three and six months ended June 30, 2022, respectively, as a result of contractual principal payments and actual prepayment activity.

Further detail on the valuation of MSRs can be found in Note 12 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation of the MSR portfolio. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. Gains and losses on these securities are recorded in securities losses, net – non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income.

The Bancorp’s total residential mortgage loans serviced as of June 30, 2023 and 2022 were $119.7 billion and $118.2 billion, respectively, with $102.8 billion and $100.5 billion, respectively, of residential mortgage loans serviced for others.

Leasing business revenue

Leasing business revenue decreased $9 million and $14 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022. The decrease for the three months ended June 30, 2023 was primarily driven by a decrease in lease remarketing fees. The decrease for the six months ended June 30, 2023 was primarily driven by a decrease in leasing business solutions revenue related to the disposition of LaSalle Solutions during the second quarter of 2022 as well as a decrease in lease remarketing fees.


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

Other noninterest income

The following table presents the components of other noninterest income:


TABLE 10: Components of Other Noninterest Income
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Equity method investment income	$	39	5	45	13
BOLI income	15		17	30	33
Cardholder fees	15		14	29	27
Private equity investment income	18		40	25	41
Banking center income	7		7	12	12
Consumer loan fees	5		5	10	9



Loss on swap associated with the sale of Visa, Inc. Class B Shares	(30)		(18)	(61)	(29)
Other, net	5		15	7	32
Total other noninterest income	$	74	85	97	138

Other noninterest income decreased $11 million and $41 million for the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022 primarily due to increases in the loss on the swap associated with the sale of Visa, Inc. Class B Shares as well as decreases in private equity investment income, partially offset by increases in equity method investment income.

The Bancorp recognized negative valuation adjustments of $30 million and $61 million related to the Visa total return swap during the three and six months ended June 30, 2023, respectively, compared to negative valuation adjustments of $18 million and $29 million during the three and six months ended June 30, 2022, respectively. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements. Private equity investment income decreased $22 million and $16 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by valuation adjustments recognized on certain private equity investments. Equity method investment income increased $34 million and $32 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to a gain on the partial disposition of an equity method investment during the three months ended June 30, 2023.

Securities gains (losses), net

Net securities gains increased $39 million and $58 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. For more information, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Noninterest expense increased $119 million and $228 million for the three and six months ended June 30, 2023 compared to the same periods in the prior year.

The following table presents the components of noninterest expense:


TABLE 11: Components of Noninterest Expense
	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2023			2022	% Change	2023			2022	% Change
Compensation and benefits	$	650		584	11	$	1,407		1,295	9
Technology and communications	114			98	16	232			199	17
Net occupancy expense	83			75	11	164			152	8
Equipment expense	36			36	—	73			72	1
Leasing business expense	31			31	—	65			63	3
Marketing expense	31			28	11	60			52	15
Card and processing expense	20			20	—	42			38	11
Other noninterest expense	266			240	11	519			463	12
Total noninterest expense	$	1,231		1,112	11	$	2,562		2,334	10
Efficiency ratio on an FTE basis(a)	56.2		%	55.1		58.1		%	59.8

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

Compensation and benefits expense increased $66 million and $112 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by the additional personnel costs of an acquired business, the impact of raising the Bancorp’s minimum wage in the third quarter of 2022, an increase in non-qualified deferred compensation expense and an


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

increase in severance expense, partially offset by a decrease in performance-based compensation. Full-time equivalent employees totaled 19,225 at June 30, 2023 compared to 19,119 at June 30, 2022.

Technology and communications expense increased $16 million and $33 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increased investments in strategic initiatives and technology modernization.

Net occupancy expense increased $8 million and $12 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by higher expenses associated with the maintenance and renovation of banking centers.

Marketing expense increased $3 million and $8 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to an increase in deposit campaigns.

The following table presents the components of other noninterest expense:


TABLE 12: Components of Other Noninterest Expense
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
FDIC insurance and other taxes	$	42	34	83	65
Loan and lease	35		42	65	87
Losses and adjustments	26		22	49	36
Data processing	22		21	44	40
Travel	17		17	34	30
Dues and subscriptions	16		14	31	28
Professional service fees	17		13	29	26
Cash and coin processing	13		11	25	22
Securities recordkeeping	12		12	25	25
Intangible amortization	10		11	22	22




Other, net	56		43	112	82
Total other noninterest expense	$	266	240	519	463

Other noninterest expense increased $26 million and $56 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in FDIC insurance and other taxes and losses and adjustments, partially offset by a decrease in loan and lease expense.

FDIC insurance and other taxes increased $8 million and $18 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of an increase in the FDIC insurance assessment rate. Losses and adjustments increased $4 million and $13 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in fraud losses and losses associated with legal and regulatory proceedings. The increase for the six months ended June 30, 2023 was also driven by increases in credit valuation adjustments on customer accommodation derivatives.

Loan and lease expense decreased $7 million and $22 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by a decrease in loan servicing expenses related to the Bancorp’s sales of certain government-guaranteed residential mortgage loans that were previously in forbearance programs and serviced by a third party.

Applicable Income Taxes

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


TABLE 13: Applicable Income Taxes
	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2023			2022	2023	2022
Income before income taxes	$	775		724	1,493	1,335
Applicable income tax expense	174			162	334	279
Effective tax rate	22.5		%	22.4	22.4	20.9

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


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

nondeductible expenses. The tax credits are primarily associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.

The effective tax rate was 22.5% and 22.4% for the three and six months ended June 30, 2023, respectively, compared to 22.4% and 20.9% for the same periods in the prior year. The increase in the effective tax rate for the six months ended June 30, 2023 compared to the same period in the prior year primarily relates to a decrease in excess tax benefits related to share-based compensation.


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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its commercial loans and leases based upon primary purpose and consumer loans based upon product or collateral. Table 14 summarizes end of period loans and leases, including loans and leases held for sale, and Table 15 summarizes average total loans and leases, including average loans and leases held for sale.


TABLE 14: Components of Total Loans and Leases (including loans and leases held for sale)
	June 30, 2023				December 31, 2022
As of ($ in millions)	Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	56,926	46	%	$	57,305	47	%
Commercial mortgage loans	11,310		9		11,020		9
Commercial construction loans	5,475		5		5,433		4
Commercial leases	2,673		2		2,704		2
Total commercial loans and leases	$	76,384	62	%	$	76,462	62	%
Consumer loans:
Residential mortgage loans	18,231		15		18,562		15
Home equity	3,911		3		4,039		3
Indirect secured consumer loans	16,097		13		16,552		14
Credit card	1,818		2		1,874		2
Other consumer loans	6,210		5		4,998		4
Total consumer loans	$	46,267	38	%	$	46,025	38	%
Total loans and leases	$	122,651	100	%	$	122,487	100	%
Total portfolio loans and leases (excluding loans and leases held for sale)	$	121,891			$	121,480

Total loans and leases, including loans and leases held for sale, increased $164 million from December 31, 2022, driven by an increase in consumer loans, partially offset by a decrease in commercial loans and leases.

Commercial loans and leases decreased $78 million from December 31, 2022 primarily due to a decrease in commercial and industrial loans, partially offset by an increase in commercial mortgage loans. Commercial and industrial loans decreased $379 million, or 1%, from December 31, 2022 primarily as a result of payoffs and decreased revolving line of credit utilization. Commercial mortgage loans increased $290 million, or 3%, from December 31, 2022 as loan originations exceeded payoffs.

Consumer loans increased $242 million, or 1%, from December 31, 2022 due to an increase in other consumer loans, partially offset by decreases in indirect secured consumer loans, residential mortgage loans and home equity. Other consumer loans increased $1.2 billion, or 24%, from December 31, 2022 primarily driven by originations of point-of-sale solar energy installation loans. Indirect secured consumer loans decreased $455 million, or 3%, from December 31, 2022 primarily driven by paydowns exceeding loan originations. Residential mortgage loans decreased $331 million, or 2%, from December 31, 2022 primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs. Home equity decreased $128 million, or 3%, from December 31, 2022 as payoffs exceeded loan originations and new advances.


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


TABLE 15: Components of Average Loans and Leases (including average loans and leases held for sale)
	June 30, 2023				June 30, 2022
For the three months ended ($ in millions)	Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	58,152	47	%	$	55,466	46	%
Commercial mortgage loans	11,374		9		10,710		9
Commercial construction loans	5,535		5		5,356		5
Commercial leases	2,703		2		2,840		2
Total commercial loans and leases	$	77,764	63	%	$	74,372	62	%
Consumer loans:
Residential mortgage loans	18,158		15		19,899		17
Home equity	3,937		3		3,895		3
Indirect secured consumer loans	16,281		13		17,241		14
Credit card	1,783		1		1,704		1
Other consumer loans	6,064		5		3,125		3
Total consumer loans	$	46,223	37	%	$	45,864	38	%
Total average loans and leases	$	123,987	100	%	$	120,236	100	%
Total average portfolio loans and leases (excluding loans and leases held for sale)	$	123,327			$	117,693

Average loans and leases, including average loans and leases held for sale, increased $3.8 billion, or 3%, for the three months ended June 30, 2023 compared to the same period in the prior year driven by increases in average commercial loans and leases and average consumer loans and leases.

Average commercial loans and leases increased $3.4 billion, or 5%, for the three months ended June 30, 2023 compared to the same period in the prior year 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 $2.7 billion, or 5%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily as a result of loan originations exceeding payoffs, partially offset by decreased revolving line of credit utilization. Average commercial mortgage loans increased $664 million, or 6%, for the three months ended June 30, 2023 compared to the same period in the prior year as loan originations exceeded payoffs. Average commercial construction loans increased $179 million, or 3%, for the three months ended June 30, 2023 compared to the same period in the prior year as draws on existing commitments and loan originations exceeded payoffs. Average commercial leases decreased $137 million, or 5%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily as a result of a planned reduction in indirect non-relationship-based lease originations.

Average consumer loans increased $359 million, or 1%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to increases in average other consumer loans and average credit card, partially offset by decreases in average residential mortgage loans and average indirect secured consumer loans. Average other consumer loans increased $2.9 billion, or 94%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily driven by originations of point-of-sale solar energy installation loans, in addition to loans acquired in a business acquisition completed in the second quarter of 2022. Average credit card increased $79 million, or 5%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to increases in balance-active customers and average balances per active account. Average residential mortgage loans decreased $1.7 billion, or 9%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs. Average indirect secured consumer loans decreased $960 million, or 6%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily driven by paydowns and lower production.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity risk management. Total investment securities were $50.8 billion and $52.2 billion at June 30, 2023 and December 31, 2022, respectively. The taxable available-for-sale debt and other investment securities portfolio had an effective duration of 5.2 at June 30, 2023 compared to 5.4 at December 31, 2022.

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 typically when bought and held principally for the purpose of selling them in the near term. At June 30, 2023, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt and other securities. The Bancorp held an immaterial amount of below-investment grade available-for-sale debt and other securities at both June 30, 2023 and December 31, 2022.


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

During the second quarter of 2023, the Bancorp recognized $4 million of impairment losses on its available-for-sale debt and other securities, included in securities gains (losses), net, in the Condensed Consolidated Statements of Income. These losses related to certain securities in unrealized loss positions where the Bancorp determined that recovery of the amortized cost basis of the securities was no longer probable.

At both June 30, 2023 and December 31, 2022, the Bancorp completed its evaluation of the available-for-sale debt and other securities in an unrealized loss position and did not recognize an allowance for credit losses. The Bancorp did not recognize provision expense related to available-for-sale debt and other securities in an unrealized loss position during both the three and six months ended June 30, 2023 and 2022.

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


TABLE 16: Components of Investment Securities
As of ($ in millions)	June 30, 2023		December 31, 2022
Available-for-sale debt and other securities (amortized cost basis):
U.S. Treasury and federal agencies securities	$	2,924	2,683
Obligations of states and political subdivisions securities	2		18
Mortgage-backed securities:
Agency residential mortgage-backed securities	11,959		12,604
Agency commercial mortgage-backed securities	29,125		29,824
Non-agency commercial mortgage-backed securities	5,027		5,235
Asset-backed securities and other debt securities	5,526		6,292
Other securities(a)	836		874
Total available-for-sale debt and other securities	$	55,399	57,530
Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities	$	—	3
Asset-backed securities and other debt securities	2		2
Total held-to-maturity securities	$	2	5
Trading debt securities (fair value):
U.S. Treasury and federal agencies securities	$	651	45
Obligations of states and political subdivisions securities	69		14
Agency residential mortgage-backed securities	9		8
Asset-backed securities and other debt securities	410		347
Total trading debt securities	$	1,139	414
Total equity securities (fair value)	$	331	317

(a)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 decreased $2.1 billion from December 31, 2022 primarily due to decreases in asset-backed securities and other debt securities, agency commercial mortgage-backed securities and agency residential mortgage-backed securities. Trading debt securities increased $725 million from December 31, 2022 primarily due to purchases of U.S. Treasury securities during the six months ended June 30, 2023 related to the Bancorp’s management of collateral posted for derivative exposures.

On an amortized cost basis, available-for-sale debt and other securities were 29% and 30% of total interest-earning assets at June 30, 2023 and December 31, 2022, respectively. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.6 years and 6.8 years at June 30, 2023 and December 31, 2022, respectively. In addition, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.00% and 2.97% at June 30, 2023 and December 31, 2022, respectively.

Information presented in Table 17 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 and reflects the impact of prepayments. 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 losses on the available-for-sale debt and other securities portfolio were $6.1 billion and $6.0 billion at June 30, 2023 and December 31, 2022, respectively. The fair values of investment securities are impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of the Bancorp’s investment securities portfolio generally decreases when interest rates increase or when credit spreads widen.


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


TABLE 17: Characteristics of Available-for-Sale Debt and Other Securities
As of June 30, 2023 ($ in millions)	Amortized Cost		Fair Value	Weighted-Average Life (in years)	Weighted-Average Yield
U.S. Treasury and federal agencies securities:
Average life after one year through five years	$	1,563	1,480	2.8	3.07	%
Average life after five years through ten years	1,361		1,260	5.4	2.57
Total	$	2,924	2,740	4.0	2.84	%
Obligations of states and political subdivisions securities:

Average life after one year through five years	2		2	1.1	—

Total	$	2	2	1.1	—	%
Agency residential mortgage-backed securities:
Average life within one year	9		9	0.3	0.83
Average life after one year through five years	817		746	3.5	2.75
Average life after five years through ten years	10,015		8,925	8.2	3.08
Average life after ten years	1,118		901	11.5	2.91
Total	$	11,959	10,581	8.2	3.04	%
Agency commercial mortgage-backed securities:(a)
Average life within one year	1		1	0.2	3.22
Average life after one year through five years	7,830		7,192	3.5	2.78
Average life after five years through ten years	16,410		14,347	7.3	2.84
Average life after ten years	4,884		4,007	12.3	2.90
Total	$	29,125	25,547	7.1	2.83	%
Non-agency commercial mortgage-backed securities:
Average life within one year	132		131	0.6	3.53
Average life after one year through five years	2,753		2,576	2.5	3.26
Average life after five years through ten years	2,142		1,782	7.9	2.78

Total	$	5,027	4,489	4.7	3.06	%
Asset-backed securities and other debt securities:
Average life within one year	211		204	0.7	3.91
Average life after one year through five years	3,773		3,495	2.9	3.65
Average life after five years through ten years	1,526		1,419	5.9	4.29
Average life after ten years	16		16	10.7	6.18
Total	$	5,526	5,134	3.7	3.84	%
Other securities	836		836
Total available-for-sale debt and other securities	$	55,399	49,329	6.6	3.00	%

(a)Taxable-equivalent yield adjustments included in the above table are 0.21% and 0.03% for securities with an average life greater than 10 years and in total, respectively.

Other Short-Term Investments

Other short-term investments primarily include overnight interest-earning investments, including reserves held at the FRB and federal funds sold. The Bancorp uses other short-term investments as part of its liquidity risk management tools. Other short-term investments were $10.9 billion at June 30, 2023, an increase of $2.6 billion from December 31, 2022. This increase was primarily attributable to the Bancorp’s decision to increase its liquidity position in response to conditions in the operating environment as of June 30, 2023.


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

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 75% and 79% of average total assets for the three months ended June 30, 2023 and 2022, respectively.

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


TABLE 18: Components of Deposits
	June 30, 2023				December 31, 2022
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	45,264	28	%	$	53,125	33	%
Interest checking	52,743		32		51,653		32
Savings	21,342		13		23,469		14
Money market	30,012		18		28,220		17
Foreign office	182		—		182		—
Total transaction deposits	$	149,543	91		$	156,649	96
CDs $250,000 or less	8,833		5		3,809		2
Total core deposits	$	158,376	96		$	160,458	98
CDs over $250,000(a)	5,752		4		3,232		2
Total deposits	$	164,128	100	%	$	163,690	100	%

(a)Includes $5.1 billion and $3.1 billion of retail brokered certificates of deposit which are covered by FDIC insurance as of June 30, 2023 and December 31, 2022, respectively.

Core deposits decreased $2.1 billion, or 1%, from December 31, 2022 primarily due to balance migration as a result of the higher interest rate environment with a decrease in transaction deposits, partially offset by an increase in CDs $250,000 or less. Transaction deposits decreased $7.1 billion, or 5%, from December 31, 2022 as decreases in demand deposits and savings deposits were partially offset by increases in money market deposits and interest checking deposits. In response to the higher interest rate environment, deposit balances have migrated, and are expected to continue to migrate, from noninterest-bearing products such as demand deposits into higher interest-bearing products such as money market accounts and CDs. Demand deposits decreased $7.9 billion, or 15%, from December 31, 2022 primarily as a result of lower balances per customer account and balance migration into interest checking deposits. Savings deposits decreased $2.1 billion, or 9%, from December 31, 2022 primarily as a result of lower balances per consumer customer account due to increased consumer spending, partially offset by higher balances per commercial customer account as a result of higher interest rates. Money market deposits increased $1.8 billion, or 6%, from December 31, 2022 primarily as a result of higher balances per consumer customer account due to higher offering rates, partially offset by lower balances per commercial customer account. Interest checking deposits increased $1.1 billion, or 2%, from December 31, 2022 primarily as a result of commercial balance growth and balance migration from demand deposits, partially offset by lower balances per consumer customer account. CDs $250,000 or less increased $5.0 billion from December 31, 2022 primarily due to higher offering rates.

CDs over $250,000 increased $2.5 billion, or 78%, from December 31, 2022 primarily due to an increase in retail brokered CDs issued, which are utilized as a short-term funding source.

The following table presents the components of average deposits for the three months ended:


TABLE 19: Components of Average Deposits
	June 30, 2023				June 30, 2022
($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	46,520	29	%	$	62,555	38	%
Interest checking	50,472		31		44,349		27
Savings	21,675		14		23,708		15
Money market	28,913		18		29,284		18
Foreign office	143		—		139		—
Total transaction deposits	$	147,723	92		$	160,035	98
CDs $250,000 or less	7,759		5		2,193		1
Total core deposits	$	155,482	97		$	162,228	99
CDs over $250,000(a)	5,375		3		662		1
Total average deposits	$	160,857	100	%	$	162,890	100	%

(a)Includes $4.9 billion and $473 million of retail brokered certificates of deposit which are covered by FDIC insurance for the three months ended June 30, 2023 and 2022, respectively.


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

On an average basis, core deposits decreased $6.7 billion, or 4%, for the three months ended June 30, 2023 compared to the same period in the prior year due to a decrease in average transaction deposits, partially offset by an increase in average CDs $250,000 or less. Average transaction deposits decreased $12.3 billion, or 8%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily driven by decreases in average demand deposits, average savings deposits and average money market deposits, partially offset by an increase in average interest checking deposits. Average demand deposits decreased $16.0 billion, or 26%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily as a result of lower average balances per customer account and balance migration into interest checking deposits. Average savings deposits decreased $2.0 billion, or 9%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to lower average balances per consumer customer account due to increased consumer spending, partially offset by the previously mentioned increase in average balances per commercial customer account as a result of higher interest rates. Average money market deposits decreased $371 million, or 1%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily as a result of lower average balances per commercial customer account and balance migration into interest checking deposits, partially offset by higher average balances per consumer customer account. Average interest checking deposits increased $6.1 billion, or 14%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily as a result of balance migration from demand deposits and money market deposits, partially offset by lower average balances per consumer customer account. Average CDs $250,000 or less increased $5.6 billion for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to higher offering rates. Lower average commercial customer account balances in demand deposits and money market deposits included the impact of deliberate runoff during the second quarter of 2022 of certain higher cost commercial deposits.

Average CDs over $250,000 increased $4.7 billion for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to an increase in retail brokered CDs issued.

Contractual maturities

The contractual maturities of CDs as of June 30, 2023 are summarized in the following table:


TABLE 20: Contractual Maturities of CDs(a)
($ in millions)
Next 12 months	$	14,257
13-24 months	235
25-36 months	65
37-48 months	18
49-60 months	6
After 60 months	4
Total CDs	$	14,585

(a)Includes CDs $250,000 or less and CDs over $250,000.

Deposit insurance

The FDIC generally provides a standard amount of insurance of $250,000 per depositor, per insured bank, for each account ownership category defined by the FDIC. Depositors may qualify for coverage of accounts over $250,000 if they have funds in different ownership categories and all FDIC requirements are met. All deposits that an account owner has in the same ownership category at the same bank are added together and insured up to the standard insurance amount. As of June 30, 2023 and December 31, 2022, approximately $97.9 billion, or 60%, and $94.1 billion, or 58%, respectively, of the Bancorp’s domestic deposits were estimated to be insured. As of June 30, 2023 and December 31, 2022, approximately $66.0 billion and $69.4 billion, respectively, of the Bancorp’s domestic deposits were estimated to be uninsured. At June 30, 2023 and December 31, 2022, approximately $2.9 billion and $727 million, respectively, of the Bancorp’s time deposits were estimated to be not fully insured. The estimated uninsured portions of those time deposits were $1.5 billion and $306 million at June 30, 2023 and December 31, 2022, respectively. Where information is not readily available to determine the amount of insured deposits, the amount of uninsured deposits is estimated, consistent with the methodologies and assumptions utilized in providing information to the Bank’s regulators.

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. Total average borrowings as a percent of average interest-bearing liabilities were 15% and 13% for the three months ended June 30, 2023 and 2022, respectively.


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

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


TABLE 21: Components of Borrowings
As of ($ in millions)	June 30, 2023		December 31, 2022
Federal funds purchased	$	163	180
Other short-term borrowings	5,817		4,838
Long-term debt	12,278		13,714
Total borrowings	$	18,258	18,732

Total borrowings decreased $474 million, or 3%, from December 31, 2022 primarily due to a decrease in long-term debt partially offset by an increase in other short-term borrowings. Long-term debt decreased $1.4 billion from December 31, 2022 primarily driven by redemptions or maturities of $1.3 billion of notes, $78 million of paydowns associated with loan securitizations and $42 million of fair value adjustments associated with hedged long-term debt during the six months ended June 30, 2023. Other short-term borrowings increased $979 million from December 31, 2022 primarily due to the Bancorp’s decision to increase its liquidity position in response to conditions in the current operating environment. The level of other short-term borrowings can fluctuate significantly from period to period depending on funding needs and the sources that are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements.

The following table summarizes components of average borrowings for the three months ended:


TABLE 22: Components of Average Borrowings
($ in millions)	June 30, 2023		June 30, 2022
Federal funds purchased	$	376	392
Other short-term borrowings	7,029		3,571
Long-term debt	12,848		11,164
Total average borrowings	$	20,253	15,127

Total average borrowings increased $5.1 billion, or 34%, for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to increases in average other short-term borrowings and average long-term debt. Average other short-term borrowings increased $3.5 billion for the three months ended June 30, 2023 compared to the same period in the prior year primarily due to increased funding needs resulting from an increase in average investment securities, lower core deposit balances and the Bancorp’s decision to increase its liquidity position in response to conditions in the current operating environment. Average long-term debt increased $1.7 billion for the three months ended June 30, 2023 compared to the same period in the prior year primarily driven by issuances of senior fixed-rate/floating-rate notes in 2022 totaling $4.0 billion, partially offset by redemptions or maturities of $1.3 billion of notes, $239 million of fair value adjustments associated with hedged long-term debt and $154 million of paydowns associated with loan securitizations since June 30, 2022. 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.


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

BUSINESS SEGMENT REVIEW

The Bancorp reports on three business segments: Commercial Banking, Consumer and Small Business Banking and Wealth and Asset Management. Additional information on each business segment is included in Note 23 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices 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. In general, the charge rates on assets increased since December 31, 2022 as they were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. The credit rates for deposit products also increased since December 31, 2022 due to higher interest rates and modified assumptions. Thus, net interest income for asset-generating business segments was negatively impacted by the rates charged on assets while deposit-providing business segments were positively impacted during the six months ended June 30, 2023.

The Bancorp’s methodology for allocating provision for credit losses 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 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 relationship depth opportunities and funding operations by accessing the capital markets as a collective unit.

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


TABLE 23: Net Income (Loss) by Business Segment
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Commercial Banking	$	711	317	1,290	657
Consumer and Small Business Banking	746		208	1,408	321
Wealth and Asset Management	73		38	146	66
General Corporate and Other	(929)		(1)	(1,685)	12
Net income	$	601	562	1,159	1,056


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

Commercial Banking

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

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


TABLE 24: Commercial Banking
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Income Statement Data
Net interest income (FTE)(a)	$	1,025	555	2,004	1,080
Provision for (benefit from) credit losses	(9)		80	37	46
Noninterest income:
Commercial banking revenue	147		137	305	272
Service charges on deposits	92		97	180	196
Leasing business revenue	47		56	104	118
Other noninterest income	50		66	82	109
Noninterest expense:
Compensation and benefits	153		153	343	335
Leasing business expense	31		31	65	63
Other noninterest expense	302		258	628	523
Income before income taxes (FTE)	884		389	1,602	808
Applicable income tax expense(a)(b)	173		72	312	151
Net income	$	711	317	1,290	657
Average Balance Sheet Data
Commercial loans and leases, including held for sale	$	73,676	70,621	73,708	69,124
Demand deposits	23,133		37,086	25,021	38,163
Interest checking deposits	30,527		19,030	28,756	20,895
Savings and money market deposits	4,949		6,093	5,008	6,516
Certificates of deposit	34		120	40	121
Foreign office deposits	143		139	143	132

(a)Includes FTE adjustments of $4 and $2 for the three months ended June 30, 2023 and 2022, respectively and $7 and $4 for the six months ended June 30, 2023 and 2022, 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.

Net income was $711 million and $1.3 billion for the three and six months ended June 30, 2023, respectively, compared to $317 million and $657 million for the same periods in the prior year. The increases for both periods were driven by increases in net interest income on an FTE basis and decreases in provision for credit losses, partially offset by increases in noninterest expense and decreases in noninterest income.

Net interest income on an FTE basis increased $470 million and $924 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in yields on and average balances of commercial loans and leases as well as increases in FTP credit rates on deposits. These positive impacts were partially offset by increases in FTP charges on commercial loans and leases as well as increases in rates paid on interest checking deposits and savings and money market deposits.

The benefit from credit losses was $9 million and the provision for credit losses was $37 million for the three and six months ended June 30, 2023, respectively, compared to the provision for credit losses of $80 million and $46 million for the three and six months ended June 30, 2022, respectively. The decreases for the three and six months ended June 30, 2023 compared to the same periods in the prior year were primarily driven by decreases in allocated provision for credit losses related to commercial criticized assets. The decrease for the three months ended June 30, 2023 was also impacted by decreases in net charge-offs on commercial and industrial loans and commercial construction loans. The decrease for the six months ended June 30, 2023 was partially offset by an increase in net charge-offs on commercial and industrial loans. Annualized net charge-offs as a percent of average portfolio loans and leases decreased to 13 bps and increased to 14 bps for the three and six months ended June 30, 2023, respectively, compared to 18 bps and 11 bps for the same periods in the prior year.

Noninterest income decreased $20 million and $24 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by decreases in other noninterest income, service charges on deposits and leasing business


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

revenue, partially offset by increases in commercial banking revenue. Other noninterest income decreased $16 million and $27 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by a decrease in private equity investment income as well as the recognition of securities losses during the three and six months ended June 30, 2023. Service charges on deposits decreased $5 million and $16 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to higher treasury management earnings credits driven by market interest rates, partially offset by an increase in commercial treasury management fees. Leasing business revenue decreased $9 million and $14 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2023 was primarily driven by a decrease in lease remarketing fees. The decrease for the six months ended June 30, 2023 was primarily driven by a decrease in leasing business solutions revenue related to the disposition of LaSalle Solutions during the second quarter of 2022 as well as a decrease in lease remarketing fees. Commercial banking revenue increased $10 million and $33 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in loan syndication fees, bridge fees and foreign exchange fees, partially offset by a decrease in merger and acquisition fees.

Noninterest expense increased $44 million and $115 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in other noninterest expense. Other noninterest expense increased $44 million and $105 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in allocated expenses, FDIC insurance and other taxes and losses associated with legal and regulatory proceedings. The increases in allocated expenses were primarily related to cash management services and information technology support services. The increase for the six months ended June 30, 2023 was also impacted by credit valuation adjustments on customer accommodation derivatives. Additionally, compensation and benefits increased $8 million for the six months ended June 30, 2023 primarily driven by increases in base compensation.

Average commercial loans and leases increased $3.1 billion and $4.6 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in average commercial and industrial loans, average commercial mortgage loans and average commercial construction loans, partially offset by decreases in average commercial leases. Average commercial and industrial loans increased for the three and six months ended June 30, 2023 compared to the same periods in the prior year primarily as a result of loan originations exceeding payoffs, partially offset by decreased revolving line of credit utilization. Average commercial mortgage loans increased for the three and six months ended June 30, 2023 compared to the same periods in the prior year as loan originations exceeded payoffs. Average commercial construction loans increased for the three and six months ended June 30, 2023 compared to the same periods in the prior year as draws on existing commitments and loan originations exceeded payoffs. Average commercial leases decreased for the three and six months ended June 30, 2023 compared to the same periods in the prior year primarily as a result of a planned reduction in indirect non-relationship-based lease originations.

Average deposits decreased $3.7 billion and $6.9 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to decreases in average demand deposits and average savings and money market deposits, partially offset by increases in average interest checking deposits. Average demand deposits decreased $14.0 billion and $13.1 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of lower average balances per commercial customer account and balance migration into interest checking deposits. Average savings and money market deposits decreased $1.1 billion and $1.5 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of lower average balances per commercial customer account and balance migration into interest checking deposits. Average interest checking deposits increased $11.5 billion and $7.9 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of balance migration from demand deposits and savings and money market deposits. Lower average commercial customer account balances in demand deposits and savings and money market deposits included the impact of deliberate runoff during the second quarter of 2022 of certain higher cost commercial deposits.


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

Consumer and Small Business Banking

Consumer and Small Business Banking provides a full range of deposit and loan products to individuals and small businesses through a network of full-service banking centers and relationships with indirect and correspondent loan originators in addition to providing products designed to meet the specific needs of small businesses, including cash management services. Consumer and Small Business Banking includes the Bancorp’s residential mortgage, home equity loans and lines of credit, credit cards, automobile and other indirect lending and other consumer lending activities. Residential mortgage activities include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans and all associated hedging activities. Indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers. Other consumer lending activities include home improvement and solar energy installation loans originated through a network of contractors and installers.

The following table contains selected financial data for the Consumer and Small Business Banking segment:


TABLE 25: Consumer and Small Business Banking
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Income Statement Data
Net interest income	$	1,370	631	2,628	1,148
Provision for credit losses	65		29	116	59
Noninterest income:
Card and processing revenue	79		79	155	152
Mortgage banking net revenue	59		31	127	82
Wealth and asset management revenue	52		51	106	102
Service charges on deposits	53		57	103	111
Other noninterest income	28		23	54	49
Noninterest expense:
Compensation and benefits	222		207	446	425
Net occupancy and equipment expense	62		60	125	116
Card and processing expense	19		18	38	35
Other noninterest expense	329		295	667	603
Income before income taxes	$	944	263	1,781	406
Applicable income tax expense	198		55	373	85
Net income	$	746	208	1,408	321
Average Balance Sheet Data
Consumer loans, including held for sale	$	43,305	42,972	43,258	43,012
Commercial loans	2,756		1,601	2,616	1,468
Demand deposits	22,265		24,024	22,439	23,756
Interest checking deposits	12,603		15,657	13,103	15,574
Savings and money market deposits	41,244		43,422	41,430	43,067
Certificates of deposit	8,208		2,409	6,830	2,509

Net income was $746 million and $1.4 billion for the three and six months ended June 30, 2023, respectively, compared to $208 million and $321 million for the same periods in the prior year. The increases were primarily 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 $739 million and $1.5 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in FTP credit rates on deposits as well as increases in yields on and average balances of loans. These positive impacts were partially offset by increases in FTP charge rates on loans as well as increases in rates paid on deposits.

Provision for credit losses increased $36 million and $57 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in net charge-offs on other consumer loans, indirect secured consumer loans, commercial and industrial loans and credit card. Annualized net charge-offs as a percent of average portfolio loans and leases increased to 57 bps and 52 bps for the three and six months ended June 30, 2023, respectively, compared to 29 bps for both of the same periods in the prior year.

Noninterest income increased $30 million and $49 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in mortgage banking net revenue. 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.


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

Noninterest expense increased $52 million and $97 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in other noninterest expense and compensation and benefits expense. Other noninterest expense increased $34 million and $64 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in allocated expenses, FDIC insurance and other taxes and marketing expense. The increases in allocated expenses were primarily related to information technology support services. These increases were partially offset by decreases in loan servicing expenses related to the Bancorp’s sales of certain government-guaranteed residential mortgage loans that were previously in forbearance programs and serviced by a third party. Compensation and benefits expense increased $15 million and $21 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by the incremental impact of acquired businesses and the impact of raising the Bancorp’s minimum wage in the third quarter of 2022, partially offset by decreases in incentive compensation.

Average consumer loans increased $333 million and $246 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to increases in average other consumer loans, partially offset by decreases in average residential mortgage loans and average indirect secured consumer loans. Average other consumer loans increased for the three and six months ended June 30, 2023 compared to the same periods in the prior year primarily driven by originations of point-of-sale solar energy installation loans, in addition to loans acquired in a business acquisition completed in the second quarter of 2022. Average residential mortgage loans decreased for the three and six months ended June 30, 2023 compared to the same periods in the prior year primarily due to decreases in residential mortgage loans held for sale as the Bancorp sold government-guaranteed loans that were previously in forbearance programs, in addition to the impacts of decreased production. Average indirect consumer loans decreased for the three and six months ended June 30, 2023 compared to the same periods in the prior year primarily driven by paydowns and lower production. Average commercial loans increased $1.2 billion and $1.1 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in average commercial and industrial loans and average commercial mortgage loans as loan originations exceeded payoffs.

Average deposits decreased $1.2 billion and $1.1 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year driven by decreases in average interest checking deposits, average savings and money market deposits and average demand deposits, partially offset by increases in average certificates of deposit. Average interest checking deposits decreased $3.1 billion and $2.5 billion, average savings and money market deposits decreased $2.2 billion and $1.6 billion and average demand deposits decreased $1.8 billion and $1.3 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily as a result of lower average balances per customer account due to increased consumer spending and balance migration into certificates of deposit. Average certificates of deposit increased $5.8 billion and $4.3 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily due to higher offering rates.


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

Wealth and Asset Management

Wealth and Asset Management provides a full range of wealth management services for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of three main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. Fifth Third 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 26: Wealth and Asset Management
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Income Statement Data
Net interest income	$	95	53	196	88
Provision for credit losses	—		—	—	—
Noninterest income:
Wealth and asset management revenue	135		132	274	274
Other noninterest income	2		—	1	2
Noninterest expense:
Compensation and benefits	55		56	116	116
Other noninterest expense	84		81	170	164
Income before income taxes	$	93	48	185	84
Applicable income tax expense	20		10	39	18
Net income	$	73	38	146	66
Average Balance Sheet Data
Loans and leases, including held for sale	$	4,444	4,490	4,448	4,317
Deposits	10,846		12,948	11,568	13,408

Net income was $73 million and $146 million for the three and six months ended June 30, 2023, respectively, compared to $38 million and $66 million for the same periods in the prior year. The increase for the three months ended June 30, 2023 was primarily driven by increases in net interest income and noninterest income, partially offset by an increase in noninterest expense. The increase for the six months ended June 30, 2023 was primarily driven by an increase in net interest income, partially offset by an increase in noninterest expense.

Net interest income increased $42 million and $108 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by an increase in FTP credit rates on deposits as well as an increase in yields on loans and leases. These positive impacts were partially offset by increases in rates paid on average deposits and an increase in FTP charge rates on loans and leases for the three and six months ended June 30, 2023 compared to the same periods in the prior year.

Noninterest income increased $5 million and decreased $1 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2023 was primarily due to increases in wealth and asset management revenue and other noninterest income. Wealth and asset management revenue increased $3 million for the three months ended June 30, 2023 driven by an increase in private client service fees. Other noninterest income increased $2 million for the three months ended June 30, 2023 primarily driven by a loss on the sale of a business in the second quarter of 2022.

Noninterest expense increased $2 million and $6 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in other noninterest expense. The increases in other noninterest expense for both the three and six months ended June 30, 2023 were primarily the result of increases in allocated expenses related to expenses associated with intercompany revenue sharing agreements and information technology support services.

Average loans and leases decreased $46 million and increased $131 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2023 was primarily driven by a decrease in average commercial and industrial loans as payoffs exceeded loan production, partially offset by an increase in average residential mortgage loans as a result of higher loan production. The increase for the six months ended June 30, 2023 was primarily driven by increases in average other consumer loans, average residential mortgage loans and average commercial mortgage loans as a result of higher loan production.


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

Average deposits decreased $2.1 billion and $1.8 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by decreases in average interest checking deposits and average demand deposits as a result of lower average balances per customer account, partially offset by an increase in 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 ACL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

Net interest income on an FTE basis decreased $1.1 billion and $2.1 billion for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in FTP credits on deposits allocated to the business segments, increases in interest expense on long-term debt, other short-term borrowings and deposits and decreases in interest income on loans and leases. These negative impacts were partially offset by increases in FTP charges to the business segments on loans and leases as well as increases in interest income on investment securities and other short-term investments. The increases in both FTP credits and FTP charges allocated to the business segments were driven by increases in market interest rates. Under the Bancorp’s internal reporting methodology, the Bancorp insulates the business segments from interest rate risk associated with fixed-rate lending by transferring this risk to General Corporate and Other through the FTP methodology. As a result, the amount of FTP credits on deposits earned by the business segments has increased at a faster pace than the amount of allocated FTP charges on loans and leases. If market interest rates remain at current levels, the FTP charges to the business segments for loans and leases will increase over time as fixed-rate loans mature and are replaced with new originations.

The provision for credit losses increased $51 million and $69 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year as a result of increases in the ACL during the three and six months ended June 30, 2023, partially offset by the impact of allocations to the business segments. Refer to the Provision for Credit Losses subsection of the Statements of Income Analysis section of MD&A for additional information.

Noninterest income increased $37 million and $43 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by the recognition of net securities gains during the three and six months ended June 30, 2023 compared to net securities losses during the three and six months ended June 30, 2022, partially offset by increases in the loss on the swap associated with the sale of Visa, Inc. Class B shares.

Noninterest expense increased $23 million and $14 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in the prior year primarily driven by increases in compensation and benefits due to higher non-qualified deferred compensation expense and severance expense as well as increases in technology and communications expense, partially offset by the impact of increases in corporate overhead allocations from General Corporate and Other to the other business segments.


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

RISK MANAGEMENT - OVERVIEW

The Risk Management Overview section included in Item 7 of the Bancorp’s Annual Report on Form 10-K describes the Bancorp’s Enterprise Risk Management Framework and Three Lines of Defense structure as well as key areas of risk, which include credit risk, liquidity risk, interest rate risk, price risk, legal and regulatory compliance risk, operational risk, reputation risk and strategic risk. Item 7 of the Bancorp’s Annual Report on Form 10-K also includes additional detailed information about the Bancorp’s processes related to operational risk management as well as legal and regulatory compliance risk management. The following information should be read in conjunction with the Bancorp’s Annual Report on Form 10-K.

CREDIT RISK MANAGEMENT

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 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 designs and monitors underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry, product 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 based on risk and exposure amount, the use of which is closely monitored. Underwriting activities are centrally managed, and Credit Risk Management 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 ratings and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the ACL is based on quarterly assessments of the estimated losses expected in the loan and lease portfolio. The Bancorp uses these assessments to maintain an adequate ACL and record any necessary charge-offs. Certain loans and leases with probable or observed credit weaknesses receive enhanced monitoring and undergo a periodic review. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit rating categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios utilizing various models. For certain portfolios, such as real estate and leveraged lending, stress testing is performed at the individual loan level during credit underwriting.

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 rating systems. The first of these risk rating systems is based on regulatory guidance for credit risk rating systems. These ratings are used by the Bancorp to monitor and manage its credit risk. The Bancorp also separately 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. This “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 categories for estimating probabilities of default and an additional eleven categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the regulatory risk rating system.

The Bancorp utilizes internally developed models to estimate expected credit losses for portfolio loans and leases. For loans and leases that are collectively evaluated, the Bancorp utilizes these models to forecast expected credit losses over a reasonable and supportable forecast period based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information about the Bancorp’s processes for developing these models, for estimating credit losses for periods beyond the reasonable and supportable forecast period and for estimating credit losses for individually evaluated loans.

For the commercial portfolio segment, the estimated probabilities of default are primarily based on the probability of default ratings assigned under the through-the-cycle dual risk rating system and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions.


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

the expected credit loss models for portfolio classes which generally have longer terms (such as residential mortgage loans and home equity) and portfolio classes containing a high concentration of loans with revolving privileges (such as home equity). The estimate of the expected balance at the time of default considers expected prepayment and utilization rates where applicable, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The Bancorp also utilizes various scoring systems, analytical tools and portfolio performance monitoring processes to assess the credit risk of the consumer and residential mortgage portfolios.

Overview

Financial market concerns around the tightening in credit due to regional bank failures began to subside in the second quarter as market credit spreads tightened, interest rates rose and equities reached levels last seen in early 2022. Resilient economic data and persistent inflationary pressures led the FOMC to forecast a further tightening in monetary policy. At the June FOMC meeting, FRB officials forecasted additional interest rate increases later this year along with a continuation of its quantitative tightening program.

Although employment data has remained resilient, other economic reports for consumer spending outlook and business investment, along with sentiment surveys, have indicated a slowing economy. The downside risks to the economic outlook continue to increase as persistent inflation above the FRB’s 2% target may force the FOMC to keep interest rates higher for longer. Increasing geopolitical tensions may also lead to higher commodity prices and reverse some of the easing seen recently in headline inflation. Against this backdrop, tighter liquidity in the banking sector is limiting the supply of credit in the economy. Over time, these factors are expected to adversely impact business investment, job growth and consumer spending which could lead to a recession.

Loan Modifications to Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Bancorp adopted ASU 2022-02, which eliminated the accounting guidance on TDRs for creditors for all loan modifications to borrowers experiencing financial difficulty occurring on or after January 1, 2023. For further information on the Bancorp’s adoption of ASU 2022-02, refer to Note 3 and Note 6 of the Notes to Condensed Consolidated Financial Statements.

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 is closely monitoring various economic conditions and their impacts on commercial borrowers, including the pace of inflation, rising interest rates, labor and supply chain issues, volatility and changes in consumer discretionary spending patterns, among others. The Bancorp maintains focus on disciplined client selection, adherence to underwriting policy and attention to concentrations.

The Bancorp provides loans to a variety of customers ranging from large multinational 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 and regional expertise to better monitor and manage different industry and geographic segments of the portfolio.


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

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 as of:


TABLE 27: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale)
	June 30, 2023					December 31, 2022
($ in millions)	Outstanding			Exposure	Nonaccrual	Outstanding	Exposure	Nonaccrual
By Industry:
Real estate	$	12,086		19,300	4	11,275	17,938	25
Manufacturing	10,935			20,841	51	11,024	21,174	88
Financial services and insurance	9,665			22,172	1	9,927	20,674	—
Business services	6,292			10,786	78	5,971	10,240	4
Healthcare	5,709			7,974	9	5,576	7,838	28
Wholesale trade	5,508			10,782	7	5,538	10,620	4
Accommodation and food	4,394			7,210	46	4,340	7,028	10
Retail trade	4,275			10,638	115	4,495	10,570	9
Communication and information	3,443			6,834	—	3,428	6,944	—
Mining	3,402			6,593	—	3,634	6,811	—
Construction	2,718			6,348	11	2,945	6,265	15
Transportation and warehousing	2,458			4,430	2	2,621	4,664	2
Utilities	1,973			4,042	—	1,862	4,172	—
Entertainment and recreation	1,666			3,014	9	1,729	3,053	67
Other services	1,137			1,599	6	1,088	1,484	9
Agribusiness	391			615	—	456	651	—
Public administration	256			368	4	343	451	1
Individuals	44			90	1	76	117	—
Other	—			—	1	61	62	1
Total	$	76,352		143,636	345	76,389	140,756	263
By Loan Size:
Less than $1 million	4		%	3	14	4	3	17
$1 million to $5 million	7			6	12	7	6	12
$5 million to $10 million	5			4	5	5	4	17
$10 million to $25 million	13			11	22	14	12	28
$25 million to $50 million	24			22	—	23	22	26
Greater than $50 million	47			54	47	47	53	—
Total	100		%	100	100	100	100	100
By State:
Texas	9		%	9	3	9	9	9
California	9			9	5	9	8	3
Illinois	9			8	7	9	9	30
Ohio	9			11	7	9	11	8
Florida	7			7	36	7	7	6
New York	6			6	—	6	6	—
Michigan	5			5	3	5	5	5
Georgia	4			4	1	4	4	1
Indiana	3			3	—	3	3	—
North Carolina	3			2	1	3	2	2
Tennessee	3			3	1	3	3	2
South Carolina	3			2	—	2	2	—
Other	30			31	36	31	31	34
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. The Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements.


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

Collateral values on nonaccrual 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. Additionally, collateral values are also reviewed at least annually for all criticized assets.

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 commercial mortgage loans that are individually evaluated for an ACL. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.


TABLE 28: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of June 30, 2023 ($ in millions)	LTV > 100%		LTV 80-100%	LTV < 80%
Commercial mortgage owner-occupied loans	$	59	491	3,781
Commercial mortgage nonowner-occupied loans	3		40	4,587
Total	$	62	531	8,368

TABLE 29: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of December 31, 2022 ($ in millions)	LTV > 100%		LTV 80-100%	LTV < 80%
Commercial mortgage owner-occupied loans	$	63	533	3,566
Commercial mortgage nonowner-occupied loans	4		65	4,510
Total	$	67	598	8,076

The Bancorp views nonowner-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 30: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)
As of June 30, 2023 ($ in millions)						For the three months ended June 30, 2023	For the six months ended June 30, 2023
	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs	Net Charge-offs
By State:
Illinois	$	1,413	1,757	—	2	—	—
Florida	1,139		1,987	—	—	—	—
Ohio	1,016		1,441	—	—	—	—
South Carolina	946		1,189	—	—	—	—
Michigan	854		1,232	—	—	—	—
Texas	735		1,408	—	—	—	—
California	621		1,087	—	—	—	—
Georgia	450		887	—	—	—	—
All other states	3,287		5,474	20	—	—	—
Total	$	10,461	16,462	20	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.


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


TABLE 31: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)
As of June 30, 2022 ($ in millions)						For the three months ended June 30, 2022	For the six months ended June 30, 2022
	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs	Net Charge-offs
By State:
Illinois	$	1,417	1,585	—	24	—	—
Florida	1,147		1,944	—	—	—	—
Ohio	1,127		1,467	—	—	—	—
South Carolina	790		967	—	—	—	—
Michigan	806		1,006	—	—	—	—
Texas	802		1,303	—	—	—	—
California	440		730	—	—	—	—
Georgia	336		778	—	—	—	—
All other states	3,353		4,944	—	4	3	3
Total	$	10,218	14,724	—	28	3	3

(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

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. The Bancorp actively manages the consumer portfolio through concentration limits, which mitigate credit risk through limiting the exposure to lower FICO scores, higher LTVs, specific geographic concentration risks and additional risk elements.

The Bancorp continues to ensure that underwriting standards and guidelines adequately account for the broader economic conditions that the consumer portfolio faces in a rising-rate environment. Guidelines are designed to ensure that the various consumer products fall within the Bancorp’s risk appetite. These guidelines will be monitored and adjusted as deemed appropriate in response to the prevailing economic conditions while remaining within the Bancorp’s risk tolerance limits.

The payment structures for certain variable rate products (such as residential mortgage loans, home equity and credit card) are susceptible to changes in benchmark interest rates. With increases in interest rates, minimum payments on these products also increase, raising the potential for the environment to be disruptive to some borrowers. The Bancorp actively monitors the portion of its consumer portfolio that is susceptible to increases in minimum payments and continues to assess the impact on the overall risk appetite and soundness of the portfolio.

Residential mortgage portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through underwriting guidelines that limit exposure to loan characteristics determined to influence credit risk. 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 $527 million of ARM loans will have rate resets during the next twelve months. Of these resets, 98% are expected to experience an increase in rate, with an average increase of approximately 1.87%. Underlying characteristics of these borrowers are relatively strong with a weighted average origination DTI of 35% and weighted average origination LTV of 71%.

Certain residential mortgage products have characteristics that may increase the Bancorp’s credit loss rates 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.


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

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


TABLE 32: Residential Mortgage Portfolio Loans by LTV at Origination
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		Weighted- Average LTV		Outstanding		Weighted- Average LTV
LTV ≤ 80%	$	12,166	62.2	%	$	12,395	61.9	%
LTV > 80%, with mortgage insurance(a)	3,048		94.6		3,092		94.7
LTV > 80%, no mortgage insurance	2,289		90.7		2,141		90.5
Total	$	17,503	71.7	%	$	17,628	71.3	%

(a)Includes loans with either borrower or 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 at origination and no mortgage insurance:


TABLE 33: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance
As of June 30, 2023 ($ in millions)					For the three months ended June 30, 2023	For the six months ended June 30, 2023
	Outstanding		90 Days Past Due and Accruing	Nonaccrual	Net Charge-offs	Net Charge-offs
By State:
Ohio	$	522	1	9	—	—
Illinois	460		1	4	—	—
Florida	389		—	3	—	—
Michigan	168		—	2	—	—
Indiana	164		—	2	—	—
North Carolina	154		—	1	—	—
Kentucky	126		—	1	—	—
All other states	306		—	7	—	—
Total	$	2,289	2	29	—	—


TABLE 34: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance
As of June 30, 2022 ($ in millions)					For the three months ended June 30, 2022	For the six months ended June 30, 2022
	Outstanding		90 Days Past Due and Accruing	Nonaccrual	Net Charge-offs	Net Charge-offs
By State:
Ohio	$	519	1	10	—	—
Illinois	445		—	4	—	—
Florida	353		—	2	—	—
Michigan	171		—	2	—	—
Indiana	155		—	2	—	—
North Carolina	151		—	—	—	—
Kentucky	120		—	1	—	—
All other states	298		—	5	—	—
Total	$	2,212	1	26	—	—

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. Approximately 32% of the outstanding balances of the Bancorp’s portfolio of home equity lines of credit have a balloon structure at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 12% of the balances mature before 2025.

The ALLL provides coverage for expected losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that is collectively evaluated is determined on a pooled basis using a probability of default, loss given default and exposure at default model framework to generate expected losses. The expected losses for the home equity portfolio are dependent upon loan


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

delinquency, FICO scores, LTV, loan age and their historical correlation with macroeconomic variables including unemployment and the home price index. The expected losses generated from models are adjusted by certain qualitative adjustment factors to reflect risks associated with current conditions and 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 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 36 and Table 37. Of the total $3.9 billion of outstanding home equity loans:

•77% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Illinois, Indiana and Kentucky as of June 30, 2023;

•37% are in senior lien positions and 63% are in junior lien positions at June 30, 2023;

•77% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended June 30, 2023; and

•The portfolio had a weighted average refreshed FICO score of 751 at June 30, 2023.

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, Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 and Note 3 of the Notes to Condensed Consolidated Financial Statements for more information.

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


TABLE 35: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		% of Total		Outstanding		% of Total
Senior Liens:
FICO ≤ 659	$	117	3	%	$	122	3	%
FICO 660-719	187		5		205		5
FICO ≥ 720	1,137		29		1,262		31
Total senior liens	$	1,441	37	%	$	1,589	39	%
Junior Liens:
FICO ≤ 659	198		5		211		5
FICO 660-719	433		11		433		11
FICO ≥ 720	1,839		47		1,806		45
Total junior liens	$	2,470	63	%	$	2,450	61	%
Total	$	3,911	100	%	$	4,039	100	%


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

The Bancorp believes that home equity portfolio loans with a greater than 80% LTV (including senior liens, if applicable) 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 as of:


TABLE 36: Home Equity Portfolio Loans Outstanding by LTV at Origination
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		Weighted- Average LTV		Outstanding		Weighted- Average LTV
Senior Liens:
LTV ≤ 80%	$	1,269	51.3	%	$	1,395	52.1	%
LTV > 80%	172		88.8		194		88.8
Total senior liens	$	1,441	56.0	%	$	1,589	56.8	%
Junior Liens:
LTV ≤ 80%	1,667		65.2		1,628		65.6
LTV > 80%	803		88.9		822		89.2
Total junior liens	$	2,470	73.4	%	$	2,450	74.1	%
Total	$	3,911	66.9	%	$	4,039	67.2	%

The following tables provide an analysis of home equity portfolio loans outstanding by state with a LTV greater than 80% (including senior liens, if applicable) at origination:


TABLE 37: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination
As of June 30, 2023 ($ in millions)						For the three months ended June 30, 2023	For the six months ended June 30, 2023
	Outstanding		Exposure	90 Days Past Due and Accruing	Nonaccrual	Net Charge-offs	Net Charge-offs
By State:
Ohio	$	300	830	—	7	—	—
Illinois	152		354	1	3	—	—
Michigan	148		411	—	2	—	—
Indiana	96		256	—	2	—	—
Florida	82		198	—	2	—	—
Kentucky	81		215	—	1	—	—
All other states	116		297	—	3	—	—
Total	$	975	2,561	1	20	—	—


TABLE 38: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination
As of June 30, 2022 ($ in millions)						For the three months ended June 30, 2022	For the six months ended June 30, 2022
	Outstanding		Exposure	90 Days Past Due and Accruing	Nonaccrual	Net (Recoveries) Charge-offs	Net (Recoveries) Charge-offs
By State:
Ohio	$	316	854	—	8	(1)	(1)
Illinois	167		364	2	5	—	(1)
Michigan	165		445	—	3	—	—
Indiana	95		249	—	2	—	—
Florida	71		173	—	2	—	—
Kentucky	84		219	—	1	—	—
All other states	112		278	—	3	—	—
Total	$	1,010	2,582	2	24	(1)	(2)

Indirect secured consumer portfolio

The indirect secured consumer portfolio is comprised of $13.0 billion of automobile loans and $3.1 billion of indirect motorcycle, powersport, recreational vehicle and marine loans as of June 30, 2023. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.


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

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


TABLE 39: Indirect Secured Consumer Portfolio Loans Outstanding by FICO Score at Origination
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		% of Total		Outstanding		% of Total
FICO ≤ 659	$	220	1	%	$	248	1	%
FICO 660-719	3,388		21		3,564		22
FICO ≥ 720	12,489		78		12,740		77
Total	$	16,097	100	%	$	16,552	100	%

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


TABLE 40: Indirect Secured Consumer Portfolio Loans Outstanding by LTV at Origination
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		Weighted- Average LTV		Outstanding		Weighted- Average LTV
LTV ≤ 100%	$	11,787	79.6	%	$	12,087	79.6	%
LTV > 100%	4,310		110.4		4,465		110.5
Total	$	16,097	87.8	%	$	16,552	87.9	%

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


TABLE 41: Indirect Secured Consumer Portfolio Loans Outstanding with an LTV Greater than 100% at Origination
As of ($ in millions)	Outstanding		90 Days Past Due and Accruing	Nonaccrual	Net Charge-offs for the Three Months Ended	Net Charge-offs for the Six Months Ended
June 30, 2023	$	4,310	—	13	9	17
June 30, 2022	4,564		5	11	3	8

Credit card portfolio

The credit card portfolio consists of predominantly prime accounts with 98% of balances existing within the Bancorp’s footprint at both June 30, 2023 and December 31, 2022. At both June 30, 2023 and December 31, 2022, 72% of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

Given the variable nature of the credit card portfolio, interest rate increases impact this product and it is regularly monitored to ensure the portfolio remains within the Bancorp’s risk tolerance.

The following table provides an analysis of the Bancorp’s outstanding credit card portfolio disaggregated based upon FICO score at origination as of:


TABLE 42: Credit Card Portfolio Loans Outstanding by FICO Score at Origination
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		% of Total		Outstanding		% of Total
FICO ≤ 659	$	73	4	%	$	80	4	%
FICO 660-719	509		28		528		28
FICO ≥ 720	1,236		68		1,266		68
Total	$	1,818	100	%	$	1,874	100	%

Other consumer portfolio loans

Other consumer portfolio loans are comprised of secured and unsecured loans originated through the Bancorp’s branch network, home improvement and solar energy installation loans originated through a network of contractors and installers, and other point-of-sale loans originated or purchased in connection with third-party companies. The Bancorp closely monitors the credit performance of point-of-sale loans. Loans originated in connection with one third-party company are impacted by certain credit loss protection coverage provided by that company. The Bancorp discontinued origination of new loans with this third-party company in September 2022.


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

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


TABLE 43: Other Consumer Portfolio Loans Outstanding by Product Type
	June 30, 2023				December 31, 2022
($ in millions)	Outstanding		% of Total		Outstanding		% of Total
Point-of-sale	$	3,771	61	%	$	2,297	46	%
Third-party point-of-sale	1,018		16		1,262		25
Other secured	896		14		909		18
Unsecured	525		9		530		11
Total	$	6,210	100	%	$	4,998	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 and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 44. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 and the Nonaccrual Loans and Leases section of Note 3 of the Notes to Condensed Consolidated Financial Statements.

Nonperforming assets were $663 million at June 30, 2023 compared to $539 million at December 31, 2022. Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.54% and 0.44% at June 30, 2023 and December 31, 2022, respectively. Nonaccrual loans and leases secured by real estate were 35% of nonaccrual loans and leases as of June 30, 2023 compared to 42% as of December 31, 2022.

Portfolio commercial nonaccrual loans and leases were $345 million at June 30, 2023, an increase of $82 million from December 31, 2022. Portfolio consumer nonaccrual loans were $284 million at June 30, 2023, an increase of $32 million from December 31, 2022. Refer to Table 45 for a rollforward of portfolio nonaccrual loans and leases.

OREO and other repossessed property was $32 million and $24 million at June 30, 2023 and December 31, 2022, respectively. The Bancorp recognized $1 million in losses on the transfer, sale or write-down of OREO properties for both the three and six months ended June 30, 2023. The Bancorp recognized an immaterial amount of losses and $1 million in gains on the transfer, sale or write-down of OREO properties for the three and six months ended June 30, 2022, respectively.

For the three and six months ended June 30, 2023, approximately $12 million and $22 million, respectively, of interest income would have been recognized if the nonaccrual portfolio loans and leases had been current in accordance with their contractual terms compared to $9 million and $15 million for the same periods in the prior year. 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.


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


TABLE 44: Summary of Nonperforming Assets and Delinquent Loans and Leases
As of ($ in millions)	June 30, 2023			December 31, 2022
Nonaccrual portfolio loans and leases:
Commercial and industrial loans	$	322		215
Commercial mortgage loans	22			40
Commercial construction loans	—			8
Commercial leases	1			—
Residential mortgage loans	137			124
Home equity	61			67
Indirect secured consumer loans	23			29
Credit card	30			27
Other consumer loans	33			5
Total nonaccrual portfolio loans and leases(a)	$	629		515
OREO and other repossessed property	32			24
Total nonperforming portfolio loans and leases and OREO	$	661		539
Nonaccrual loans held for sale	2			—
Total nonperforming assets	$	663		539
Total portfolio loans and leases 90 days past due and still accruing:
Commercial and industrial loans	$	6		11
Commercial mortgage loans	20			—

Commercial leases	—			2
Residential mortgage loans(b)	7			7
Home equity	1			1

Credit card	17			18
Other consumer loans	—			1
Total portfolio loans and leases 90 days past due and still accruing	$	51		40
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO	0.54		%	0.44
Nonperforming portfolio loans and leases as a percent of portfolio loans and leases	0.52			0.42
ACL as a percent of nonperforming portfolio loans and leases	403			468
ACL as a percent of nonperforming portfolio assets	383			447

(a)Includes $18 and $15 of nonaccrual government insured commercial loans whose repayments are insured by the SBA as of June 30, 2023 and December 31, 2022, respectively.

(b)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 $169 as of June 30, 2023 and $212 as of December 31, 2022. The Bancorp recognized losses of $1 for both the three and six months ended June 30, 2023 and 2022, due to claim denials and curtailments associated with these insured or guaranteed loans.

The following tables provide a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:


TABLE 45: Rollforward of Portfolio Nonaccrual Loans and Leases
For the six months ended June 30, 2023 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	263	124	128	515
Transfers to nonaccrual status	306		43	178	527
Transfers to accrual status	(59)		(15)	(48)	(122)
Transfers to held for sale	(4)		—	—	(4)
Loan paydowns/payoffs	(99)		(13)	(32)	(144)
Transfers to OREO	—		(4)	(5)	(9)
Charge-offs	(68)		—	(74)	(142)
Draws/other extensions of credit	6		2	—	8
Balance, end of period	$	345	137	147	629


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


TABLE 46: Rollforward of Portfolio Nonaccrual Loans and Leases
For the six months ended June 30, 2022 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	337	33	128	498
Transfers to nonaccrual status	103		98	63	264
Transfers to accrual status	(2)		(17)	(35)	(54)
Transfers to held for sale	(4)		—	—	(4)
Loan paydowns/payoffs	(69)		(8)	(28)	(105)
Transfers to OREO	—		(2)	—	(2)
Charge-offs	(48)		—	(13)	(61)
Draws/other extensions of credit	2		1	—	3
Balance, end of period	$	319	105	115	539

Analysis of Net Loan Charge-offs

Net charge-offs were 29 bps and 21 bps of average portfolio loans and leases for the three months ended June 30, 2023 and 2022, respectively, and were 27 bps and 17 bps of average portfolio loans and leases for the six months ended June 30, 2023 and 2022, respectively. Table 47 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 as a percent of average portfolio commercial loans and leases decreased to 16 bps during the three months ended June 30, 2023, compared to 19 bps during the same period in the prior year primarily due to a decrease in net charge-offs on commercial construction loans of $3 million. The ratio of commercial loan and lease net charge-offs as a percent of average portfolio commercial loans and leases increased to 16 bps during the six months ended June 30, 2023, compared to 12 bps during the same period in the prior year primarily due to an increase in net charge-offs on commercial and industrial loans of $20 million.

The ratio of consumer loan net charge-offs as a percent of average portfolio consumer loans increased to 50 bps and 46 bps during the three and six months ended June 30, 2023, respectively, compared to 24 bps and 25 bps during the same periods in the prior year primarily due to increases in net charge-offs on other consumer loans of $17 million and $31 million for the three and six months ended June 30, 2023, respectively, and increases in net charge-offs on indirect secured consumer loans of $11 million and $16 million for the three and six months ended June 30, 2023, respectively.


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


TABLE 47: Summary of Credit Loss Experience
	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2023			2022	2023	2022
Losses charged-off:
Commercial and industrial loans	$	(35)		(34)	(67)	(45)
Commercial mortgage loans	—			—	(1)	—
Commercial construction loans	—			(3)	(1)	(3)
Commercial leases	—			—	—	—
Residential mortgage loans	(1)			—	(2)	(1)
Home equity	(2)			(3)	(4)	(5)
Indirect secured consumer loans	(25)			(14)	(48)	(30)
Credit card	(21)			(18)	(40)	(35)
Other consumer loans(a)	(37)			(18)	(68)	(35)
Total losses charged-off	$	(121)		(90)	(231)	(154)
Recoveries of losses previously charged-off:
Commercial and industrial loans	$	3		1	5	3
Commercial mortgage loans	—			—	1	1
Commercial construction loans	—			—	—	—
Commercial leases	—			—	—	—
Residential mortgage loans	1			1	2	2
Home equity	1			3	4	6
Indirect secured consumer loans	9			9	19	17
Credit card	5			4	9	8
Other consumer loans(a)	12			10	23	21
Total recoveries of losses previously charged-off	$	31		28	63	58
Net losses charged-off:
Commercial and industrial loans	$	(32)		(33)	(62)	(42)
Commercial mortgage loans	—			—	—	1
Commercial construction loans	—			(3)	(1)	(3)
Commercial leases	—			—	—	—
Residential mortgage loans	—			1	—	1
Home equity	(1)			—	—	1
Indirect secured consumer loans	(16)			(5)	(29)	(13)
Credit card	(16)			(14)	(31)	(27)
Other consumer loans	(25)			(8)	(45)	(14)
Total net losses charged-off	$	(90)		(62)	(168)	(96)
Net losses charged-off as a percent of average portfolio loans and leases:
Commercial and industrial loans	0.22		%	0.24	0.22	0.16
Commercial mortgage loans	0.01			—	0.01	(0.02)
Commercial construction loans	(0.01)			0.23	0.04	0.12
Commercial leases	(0.03)			(0.03)	(0.04)	(0.02)
Total commercial loans and leases	0.16		%	0.19	0.16	0.12
Residential mortgage loans	—			(0.02)	—	(0.02)
Home equity	0.06			(0.06)	0.01	(0.06)
Indirect secured consumer loans	0.38			0.13	0.36	0.15
Credit card	3.61			3.26	3.52	3.19
Other consumer loans	1.63			1.04	1.52	1.05
Total consumer loans	0.50		%	0.24	0.46	0.25
Total net losses charged-off as a percent of average portfolio loans and leases	0.29		%	0.21	0.27	0.17

(a)The Bancorp recorded $8 and $17 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements for the three and six months ended June 30, 2023, respectively, compared to $7 and $15 for the three and six months ended June 30, 2022, respectively.


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

Allowance for Credit Losses

The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. As described in Note 3 of the Notes to Condensed Consolidated Financial Statements, the Bancorp maintains the ALLL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans and leases (as adjusted for prepayments). The Bancorp’s methodology for determining the ALLL includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated. For collectively evaluated loans and leases, the Bancorp uses quantitative models to forecast expected credit losses based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. The Bancorp’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable.

The Bancorp also considers qualitative factors in determining the ALLL. Qualitative adjustments are used to capture characteristics in the portfolio that impact expected credit losses which are not fully captured within the Bancorp’s expected credit loss models. These factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. In addition, the qualitative adjustment framework can be utilized to address specific idiosyncratic risks such as geopolitical events, natural disasters or changes in current economic conditions that are not reflected in the quantitative credit loss models, and their effects on regional borrowers and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology.

In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Condensed Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the ALLL. The provision for unfunded commitments is included in the provision for credit losses in the Condensed Consolidated Statements of Income.

For the commercial portfolio segment, the estimates for probability of default are primarily based on internal ratings assigned to each commercial borrower on a 13-point scale and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions.

For collectively evaluated loans in the consumer and residential mortgage portfolio segments, the Bancorp’s expected credit loss models primarily utilize the borrower’s FICO score and delinquency history in combination with macroeconomic conditions when estimating the probability of default. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. The expected balance at the estimated date of default is also especially impactful in the expected credit loss models for portfolio classes which generally have longer terms (such as residential mortgage loans and home equity) and portfolio classes containing a high concentration of loans with revolving privileges (such as home equity). The estimate of the expected balance at the time of default considers expected prepayment and utilization rates where applicable, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions.

At both June 30, 2023 and December 31, 2022, the Bancorp used three forward-looking economic scenarios during the reasonable and supportable forecast period in its expected credit loss models to address the inherent imprecision in macroeconomic forecasting. Each of the three scenarios was developed by a third party that is subject to the Bancorp’s Third-Party Risk Management program including oversight by the Bancorp’s independent model risk management group. The scenarios included a most likely outcome (Baseline) and two less probable scenarios with one being more favorable than the Baseline and the other being less favorable. The more favorable alternative scenario (Upside) depicted a stronger near-term growth outlook while the less favorable outlook (Downside) depicted a moderate recession.

The Baseline scenario was developed such that the expectation is that the economy will perform better than the projection 50% of the time and worse than the projection 50% of the time. The Upside scenario was developed such that there is a 10% probability that the economy will perform better than the projection and a 90% probability that it will perform worse. The Downside scenario was developed such that there is a 90% probability that the economy will perform better than the projection and a 10% probability that it will perform worse.

June 30, 2023 ACL

The ACL as of June 30, 2023 was impacted by several factors, including deterioration in the economic forecast and increases to specific reserves on individually evaluated commercial loans, partially offset by lower period-end loan and lease balances. The increase in specific reserves and lower period-end loan and lease balances was primarily driven by commercial and industrial loans. As of June 30, 2023, the Bancorp’s economic scenarios included estimates of the expected impacts of the changes in economic conditions caused by inflationary and rising interest rate pressures and the ongoing Russia-Ukraine conflict. At June 30, 2023, the Bancorp assigned an 80% probability weighting to the Baseline scenario and 10% to each of the Upside and Downside scenarios.


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

The Baseline scenario assumed average annualized real GDP growth for 2023 at 1.6% with the forecast modestly increasing to 1.7% in 2024, and further increasing to 2.4% in 2025. The Baseline scenario also assumed an average unemployment rate of 3.6% for the remainder of 2023, increasing to an average of 4.0% for 2024 and an average of 4.2% in 2025. Lastly, the Baseline scenario assumed that increases to the target federal funds rate would end in 2023, peaking at 4.9% and then decreasing to an average of 4.3% and 3.2% in 2024 and 2025, respectively. The Upside scenario assumed that, on an average annual basis, the change in real GDP would be 2.1% in 2023, increasing to 3.2% in 2024 and decreasing to an average of 2.4% in 2025. The Upside scenario also assumed an unemployment rate at an annual average of 3.3% and 3.1% in 2023 and 2024, respectively, slightly increasing to 3.5% in 2025. In the Upside scenario, the forecast for the federal funds rate was consistent with the Baseline scenario. The Downside scenario assumes that the U.S. economy falls into a recession in the third quarter of 2023 and that the Russia-Ukraine conflict persists for an extended period. The Downside scenario assumed average annualized real GDP growth for 2023 at 0.8%, declining to an average of (1.4%) in 2024 and recovering to an average of 2.1% in 2025. The Downside scenario unemployment rate peaks at an average of 7.6% in 2024 and decreases to an average of 6.8% in 2025. In the Downside scenario, the forecast for the federal funds rate included a similar increase as the Baseline scenario for 2023, followed by a decrease to an average target rate of 2.9% in 2024 and 1.2% in 2025.

The Bancorp’s quantitative credit loss models are sensitive to changes in economic forecast assumptions over the reasonable and supportable forecast period. Applying a 100% probability weighting to the Downside scenario rather than using the probability-weighted three scenario approach would result in an increase in the quantitative ACL of approximately $2.3 billion. This sensitivity calculation only reflects the impact of changing the probability weighting of the scenarios in the quantitative credit loss models and excludes any additional considerations associated with the qualitative component of the ACL that might be warranted if probability weights were adjusted.

The following table provides a rollforward of the Bancorp’s ACL:


TABLE 48: Changes in Allowance for Credit Losses
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
ALLL:
Balance, beginning of period	$	2,215	1,908	2,194	1,892
Impact of adoption of ASU 2022-02(b)	—		—	(49)	—
Losses charged-off(a)	(121)		(90)	(231)	(154)
Recoveries of losses previously charged-off(a)	31		28	63	58
Provision for loan and lease losses	202		168	350	218
Balance, end of period	$	2,327	2,014	2,327	2,014
Reserve for unfunded commitments:
Balance, beginning of period	$	232	177	216	182
(Benefit from) provision for the reserve for unfunded commitments	(25)		11	(9)	6
Balance, end of period	$	207	188	207	188

(b)Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.


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

The following table provides an attribution of the Bancorp’s ALLL to portfolio loans and leases:


TABLE 49: Attribution of Allowance for Loan and Lease Losses to Portfolio Loans and Leases
As of ($ in millions)	June 30, 2023			December 31, 2022
Attributed ALLL:
Commercial and industrial loans	$	841		776
Commercial mortgage loans	277			246
Commercial construction loans	62			90
Commercial leases	19			15
Residential mortgage loans	173			245
Home equity	114			133
Indirect secured consumer loans	245			187
Credit card	224			254
Other consumer loans	372			248
Total ALLL	$	2,327		2,194
Portfolio loans and leases:
Commercial and industrial loans	$	56,897		57,232
Commercial mortgage loans	11,310			11,020
Commercial construction loans	5,475			5,433
Commercial leases	2,670			2,704
Residential mortgage loans(a)	17,503			17,628
Home equity	3,911			4,039
Indirect secured consumer loans	16,097			16,552
Credit card	1,818			1,874
Other consumer loans	6,210			4,998
Total portfolio loans and leases	$	121,891		121,480
Attributed ALLL as a percent of respective portfolio loans and leases:
Commercial and industrial loans	1.48		%	1.36
Commercial mortgage loans	2.45			2.23
Commercial construction loans	1.13			1.66
Commercial leases	0.71			0.55
Residential mortgage loans	0.99			1.39
Home equity	2.91			3.29
Indirect secured consumer loans	1.52			1.13
Credit card	12.32			13.55
Other consumer loans	5.99			4.96
Total ALLL as a percent of portfolio loans and leases	1.91		%	1.81
Total ACL as a percent of portfolio loans and leases	2.08			1.98

(a)Includes residential mortgage loans measured at fair value of $124 at June 30, 2023 and $123 at December 31, 2022.

The Bancorp’s ALLL may vary significantly from period to period based on changes in economic conditions, economic forecasts and the composition and credit quality of the Bancorp’s loan and lease portfolio. For additional information on the Bancorp’s methodology for measuring the ALLL, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements. For additional information on the Bancorp’s methodology for measuring the reserve for unfunded commitments, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.


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

INTEREST RATE AND PRICE RISK MANAGEMENT

Interest rate risk is the risk to earnings or capital arising from movement of interest rates. This 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. Price risk is the risk to earnings or capital arising from changes in the value of financial instruments and portfolios due to movements in interest rates, volatilities, foreign exchange rates, equity prices and commodity prices. 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.

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. Changes in interest rates and other market factors can impact earnings through changes in the value of portfolios, if not appropriately hedged. Stability of the Bancorp’s net income is largely dependent upon the effective management of interest rate risk and to a lesser extent price risk. Management continually reviews the Bancorp’s on- and off-balance sheet composition, earnings flows, and hedging strategies and models interest rate risk and price risk exposures, and possible actions to manage these risks, given numerous possible future interest rate and market factor scenarios. A series of policy limits and key risk indicators are employed to ensure that risks are managed within the Bancorp’s risk tolerance for interest rate risk and price risk.

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.

The Commercial Banking and Wealth and Asset Management lines of business manage price risk for capital markets sales and trading activities related to their respective businesses. The Consumer and Small Business Banking line of business manages price risk for the origination and sale of conforming residential mortgage loans to government agencies and government-sponsored enterprises. The Bancorp’s Treasury department manages interest rate risk and price risk for all other activities. Independent oversight is provided by ERM, and key risk indicators and Board-approved policy limits are used to ensure risks are managed within the Bancorp’s risk tolerance.

The Bancorp’s Market Risk Management Committee, which includes senior management representatives and reports to the Corporate Credit Committee (accountable to the ERMC), provides oversight and monitors price risk for the capital markets sales and trading activities. The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, provides oversight and monitors interest rate and price risks for Mortgage and Treasury 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. The NII simulation model does not represent a forecast of the Bancorp’s net interest income but is a tool utilized to assess the risk of the impact of changing market interest rates across a range of market interest rate environments. As a result, actual results will differ from simulated results for multiple reasons, which may include actual balance sheet composition differences, timing, magnitude and frequency of interest rate changes, deviations from projected customer behavioral assumptions as well as from changes in market conditions and management strategies.

As of June 30, 2023, 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 under parallel ramped increases and decreases in interest rates. Policy limits are utilized for scenarios assuming a 200 bps increase and a 200 bps decrease in interest rates over twelve months. The Bancorp routinely analyzes various potential and extreme scenarios, including parallel ramps and shocks as well as steepening and other 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. Additionally, the Bancorp routinely evaluates its exposures to changes in the bases between interest rates.

In order to recognize the risk of noninterest-bearing demand deposit balance migration or attrition in a rising interest rate environment, the Bancorp’s NII sensitivity modeling assumes additional attrition of approximately $800 million of demand deposit balances over a period of 24 months for each 100 bps increase in short-term market interest rates. Similarly, the Bancorp’s NII sensitivity modeling incorporates approximately $800 million of incremental growth in noninterest-bearing deposit balances over 24 months for each 100 bps decrease in short-


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

term market interest rates. The incremental balance attrition 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 the Bancorp’s interest-bearing deposit rates will change for a given change in short-term market rates. The Bancorp utilizes dynamic deposit beta models to adjust assumed repricing sensitivity depending on market rate levels. The dynamic beta models were developed utilizing the Bancorp’s performance during prior interest rate cycles. Since the beginning of the current tightening cycle, the Bancorp’s actual cumulative deposit beta through June 30, 2023 was approximately 45% as repricing has been slower than what was experienced in prior interest rate cycles. As a result, the Bancorp has outperformed previous NII simulation expectations. Using the dynamic beta models, the Bancorp’s NII sensitivity modeling assumes weighted-average rising-rate interest-bearing deposit betas at the end of the ramped parallel scenarios of 74% and 75%, for a 100 bps and 200 bps increase in rates, respectively. In the event of rate cuts, this approach assumes a weighted-average falling-rate interest-bearing deposit beta at the end of the ramped parallel scenarios of 65% and 63% for a 100 bps and 200 bps increase in rates, respectively. In falling rate scenarios, deposit rate floors are utilized to ensure modeled deposit rates will not become negative. NII simulation modeling assumes 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. In addition, modeled and forecasted deposit migration from low-beta deposit products to more rate-sensitive deposit products in the rising rate scenarios contribute additional beta of 10%-15%, resulting in an effective beta of approximately 85%-90% in the Bancorp’s baseline NII sensitivity profile. Future actual performance will be dependent on market conditions, the level of competition for deposits and the magnitude of continued interest rate increases. The Bancorp provides sensitivity analysis in Tables 51 and 52 for key assumptions related to its deposit modeling, including beta and DDA balance performance.

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:


TABLE 50: Estimated NII Sensitivity Profile and ALCO Policy Limits
	June 30, 2023					June 30, 2022
	% Change in NII (FTE)			ALCO Policy Limit		% Change in NII (FTE)		ALCO Policy Limit
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	(3.89)	%	(5.73)	(4.00)	(6.00)	0.60	4.06	(4.00)	(6.00)
+100 Ramp over 12 months	(1.93)		(2.76)	N/A	N/A	0.14	2.23	N/A	N/A
-100 Ramp over 12 months	0.93		0.63	N/A	N/A	(4.25)	(10.31)	(8.00)	(12.00)
-200 Ramp over 12 months	1.54		0.48	(8.00)	(12.00)	N/A	N/A	N/A	N/A

Table 50 presents the change in estimated net interest income for 12 month and 13-24 month horizons for alternative interest rate scenarios relative to the net interest income projection for a static rate scenario for those same time horizons. As previously mentioned, these numbers do not represent a forecast, but are instead risk measures that are monitored to evaluate the consolidated interest rate risk position of the Bancorp. At June 30, 2023, the Bancorp’s NII sensitivity in the rising-rate scenarios is negative in years one and two as interest expense is expected to increase more than interest income due to deposit repricing and balance migration estimates given the high interest rate environment. The Bancorp’s NII simulation projects an increase in NII in both years one and two under the parallel 200 bps ramp decrease in interest rates. These NII increases are driven by deposits repricing faster than assets as a result of positioning in securities with less near-term principal cash flows. Additionally, receive-fixed hedges have added significant protection from declining rates. The changes in the estimated NII sensitivity profile compared to June 30, 2022 were primarily attributable to a higher composition of fixed rate lending combined with higher market interest rates driving higher expected betas.

Tables 51 and 52 provide the sensitivity of the Bancorp’s estimated NII profile at June 30, 2023 to changes to certain deposit balance and deposit repricing sensitivity (beta) assumptions.


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

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 June 30, 2023:


TABLE 51: Estimated NII Sensitivity Profile at June 30, 2023 with a $1 Billion Change in Demand Deposit Assumption
	% 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	(4.99)	%	(6.88)	(2.79)	(4.57)
+100 Ramp over 12 months	(2.93)		(3.75)	(0.92)	(1.77)
-100 Ramp over 12 months	0.12		(0.04)	1.74	1.30
-200 Ramp over 12 months	0.82		(0.03)	2.25	0.99

The following table includes the Bancorp’s estimated NII sensitivity profile with a 10% increase and a 10% decrease to the corresponding deposit beta assumptions as of June 30, 2023:


TABLE 52: Estimated NII Sensitivity Profile at June 30, 2023 with Deposit Beta Assumptions Changes
	% Change in NII (FTE)
	Betas 10% Higher(a)			Betas 10% Lower(a)
Change in Interest Rates (bps)	12 Months		13-24 Months	12 Months	13-24 Months
+200 Ramp over 12 months	(5.40)	%	(8.49)	(2.38)	(2.96)
+100 Ramp over 12 months	(2.68)		(4.13)	(1.17)	(1.39)
-100 Ramp over 12 months	1.58		1.79	0.29	(0.52)
-200 Ramp over 12 months	2.81		2.73	0.26	(1.78)

(a)Applies a +/- 10% multiple on assumed betas.

Economic Value of Equity Sensitivity

The Bancorp also uses EVE as a measurement tool to govern and manage its interest rate risk exposure. Policy limits are utilized for scenarios assuming an instantaneous 200 bps increase and a 200 bps decrease in interest rates. 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 balance sheet and off-balance sheet 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 any assumptions related to continued production or renewal activities 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:

TABLE 53: Estimated EVE Sensitivity Profile

June 30, 2023

June 30, 2022

Change in Interest Rates (bps)

% Change in EVE

ALCO
Policy Limit

% Change in EVE

ALCO
Policy Limit

+200 Shock

(5.94)

(12.00)

(8.46)

(12.00)

+100 Shock

(2.70)

N/A

(4.12)

N/A

-100 Shock

2.04

N/A

-150 Shock

N/A

4.01

-12.00

-200 Shock

1.41

(12.00)

N/A

The EVE sensitivity is negative in a +200 bps rising-rate scenario and positive in a -200 bps falling-rate scenario at June 30, 2023. The changes in the estimated EVE sensitivity profile from June 30, 2022 were primarily related to the shortening of the investment portfolio duration.

While an instantaneous shift in spot interest rates followed by forward projections is used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be


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

impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not account for 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, SOFR, 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 54 and 55 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, to hedge the exposure to changes in fair value of a recognized asset attributable to changes in the benchmark interest rate 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, refer to Note 13 of the Notes to Condensed 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 54: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments
As of June 30, 2023 ($ in millions)	Notional Amount(b)		Fair Value	Remaining (years)	Fixed Rate		Index
Interest rate swaps related to C&I loans – cash flow – receive-fixed	$	9,000	(8)	0.1	2.81	%	1 ML / SOFR
Interest rate swaps related to C&I loans – cash flow – receive-fixed – forward starting(a)	17,500		(3)	7.8	4.65		SOFR
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed	4,000		(11)	0.1	0.99		1 ML
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed – forward starting(a)	8,000		(2)	10.2	4.50		SOFR
Interest rate swaps related to long-term debt – fair value – receive-fixed	5,955		(39)	5.4	5.18		SOFR

Total interest rate swaps	$	44,455	(63)
Interest rate floors related to C&I loans – cash flow – receive-fixed	$	3,000	3	1.5	2.25		1 ML

(a)Forward starting swaps will become effective on various dates between July 2023 and February 2025.

(b)Includes replacement contracts with a notional amount of $12.5 billion related to the LIBOR transition. For additional information, refer to the Overview section of MD&A.


TABLE 55: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments
As of December 31, 2022 ($ in millions)	Notional Amount		Fair Value	Remaining (years)	Fixed Rate		Index
Interest rate swaps related to C&I loans – cash flow – receive-fixed	$	8,000	(76)	1.0	3.02	%	1 ML
Interest rate swaps related to C&I loans – cash flow – receive-fixed – forward starting(a)	11,000		22	8.3	3.05		1 ML
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed	4,000		(25)	2.1	0.99		1 ML
Interest rate swaps related to commercial mortgage and commercial construction loans – cash flow – receive-fixed – forward starting(a)	4,000		5	9.1	3.50		1 ML
Interest rate swaps related to long-term debt – fair value – receive-fixed	5,955		(69)	5.9	5.18		1 ML / 3 ML / SOFR
Total interest rate swaps	$	32,955	(143)
Interest rate floors related to C&I loans – cash flow – receive-fixed	$	3,000	4	2.0	2.25		1 ML

(a)Forward starting swaps will become effective on various dates between February 2023 and February 2025.


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

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 Price 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 potential future 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 13 of the Notes to Condensed Consolidated Financial Statements.

Residential Mortgage Servicing Rights and Price Risk

The fair value of the residential MSR portfolio was $1.8 billion and $1.7 billion at June 30, 2023 and December 31, 2022, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. For further information on the significant drivers and components of the valuation adjustments on MSRs, refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A. 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 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 12 of the Notes to Condensed Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge price risk on MSRs.

Foreign Currency Risk

The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Condensed Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at June 30, 2023 and December 31, 2022 was $1.1 billion and $1.0 billion, 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 price 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. 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 potential future 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 price 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 potential future exposure on these contracts and counterparty credit approvals performed by independent risk management.


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

LIQUIDITY RISK MANAGEMENT

The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of 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 17 of the Notes to Condensed 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 liquidity 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.

Of the $49.3 billion of securities in the Bancorp’s available-for-sale debt and other securities portfolio at June 30, 2023, $4.2 billion in principal and interest is expected to be received in the next 12 months and an additional $6.2 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 pledge, 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 and leases, home equity loans, automobile loans and other consumer loans (including point-of-sale solar energy installation loans) are also capable of being securitized or sold. For the three and six months ended June 30, 2023, the Bancorp sold loans and leases totaling $1.3 billion and $2.6 billion, respectively, compared to $3.1 billion and $6.6 billion during the three and six months ended June 30, 2022, respectively. For further information, refer to Note 12 of the Notes to Condensed Consolidated Financial Statements.

Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low-cost funds. The Bancorp’s average core deposits and average shareholders’ equity funded 84% and 85% of its average total assets for the three and six months ended June 30, 2023, respectively, compared to 88% and 89% for the three and six months ended and June 30, 2022, respectively. 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. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.

In June of 2023, the Board of Directors authorized $10.0 billion of debt or other securities for issuance, all of which was available for issuance as of June 30, 2023. 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. For further information on a subsequent event related to long-term debt, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements.


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

As of June 30, 2023, the Bank’s global bank note program had a borrowing capacity of $25.0 billion, of which $20.9 billion was available for issuance. Additionally, at June 30, 2023, the Bank had approximately $61.6 billion of borrowing capacity available through secured borrowing sources, including the FRB (through the Bank Term Funding Program and the Discount Window) and the FHLB.

Current Liquidity Position

The Bancorp maintains a strong liquidity profile driven by strong core deposit funding and approximately $100 billion in current available liquidity. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for more information regarding the Bancorp’s deposit portfolio characteristics. The Bancorp is managing liquidity prudently in the current environment and maintains a liquidity profile focused on core deposit and stable long-term funding sources, while supplementing with a variety of secured and unsecured wholesale funding sources across the maturity spectrum, which allows for the effective management of concentration and rollover risk. The Bancorp’s investment portfolio remains highly concentrated in liquid and readily marketable instruments and is a significant source of secured borrowing capacity. As part of its liquidity management activities, the Bancorp maintains collateral at its secured funding providers to ensure immediate availability of funding. Additionally, the Bancorp executes periodic test trades to assess the operational processes associated with its secured funding sources, including the Discount Window and the newly created Bank Term Funding Program.

As of June 30, 2023, the Bancorp (parent company) has sufficient liquidity to meet contractual obligations and all preferred and common dividends without accessing the capital markets or receiving upstream dividends from the Bank subsidiary for 24 months.

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 56. 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 56: Agency Ratings

As of August 7, 2023

Moody’s

Standard and Poor’s

Fitch

DBRS Morningstar

Fifth Third Bancorp:

Short-term borrowings

No rating

A-2

R-1L

Senior debt

Baa1

BBB+

A-

Subordinated debt

Baa1

BBB

BBB+

Fifth Third Bank, National Association:

Short-term borrowings

P-2

A-2

R-1M

Short-term deposit

P-1

No rating

Long-term deposit

No rating

Senior debt

A-

Subordinated debt

BBB+

Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank, National Association

Stable


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

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 57: 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 1 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
Leverage:
Fifth Third Bancorp	4.00		N/A
Fifth Third Bank, National Association	4.00		5.00

The Bancorp is subject to the stress capital buffer requirement and must maintain capital ratios above its buffered minimum (regulatory minimum plus stress capital buffer) in order to avoid certain limitations on capital distributions and discretionary bonuses to executive officers. The FRB uses the supervisory stress test to determine the Bancorp’s stress capital buffer, subject to a floor of 2.5%. The Bancorp’s stress capital buffer requirement has been 2.5% since the introduction of this framework and was most recently affirmed as part of Fifth Third’s 2023 Capital Plan submission with an effective date of October 1, 2023. The Bancorp’s capital ratios have exceeded the stress capital buffer requirement for all periods presented.

The Bancorp adopted ASU 2016-13 on January 1, 2020 and elected the five-year transition phase-in option for the impact of CECL on regulatory capital with its regulatory filings as of March 31, 2020. The Bancorp’s modified CECL transition amount became subject to the phase-out provisions of the final rule on January 1, 2022, and will be fully phased-out by January 1, 2025. The impact of the modified CECL transition amount on the Bancorp’s regulatory capital at June 30, 2023 was an increase in capital of approximately $249 million. On a fully phased-in basis, the Bancorp’s CET1 ratio would be reduced by 13 bps as of June 30, 2023.

On July 27, 2023, the U.S. banking regulators issued a notice of proposed rulemaking to revise the regulatory capital requirements for large banking organizations, including Fifth Third. The Bancorp is evaluating the impact of the proposed rules on its regulatory capital.


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

The following table summarizes the Bancorp’s capital ratios as of:


TABLE 58: Capital Ratios
($ in millions)	June 30, 2023			December 31, 2022
Quarterly average total Bancorp shareholders’ equity as a percent of average assets	8.90		%	8.18
Tangible equity as a percent of tangible assets(a)(b)	8.58			8.31
Tangible common equity as a percent of tangible assets(a)(b)	7.57			7.30
Regulatory capital:(c)
CET1 capital	$	16,100		15,670
Tier 1 capital	18,216			17,786
Total regulatory capital	21,781			21,606
Risk-weighted assets	169,720			168,909
Regulatory capital ratios:(c)
CET1 capital	9.49		%	9.28
Tier 1 risk-based capital	10.73			10.53
Total risk-based capital	12.83			12.79
Leverage	8.81			8.56

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

(b)Excludes AOCI.

(c)Regulatory capital ratios as of both June 30, 2023 and December 31, 2022 are calculated pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital.

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.

Under the Enhanced Prudential Standards tailoring rules, the Bancorp is subject to Category IV standards, under which the Bancorp is no longer required to file semi-annual, company-run stress tests with the FRB and publicly disclose the results. However, the Bancorp is required to develop and maintain a capital plan approved by the Board of Directors on an annual basis. As an institution subject to Category IV standards, the Bancorp is subject to the FRB’s supervisory stress tests every two years, the Board capital plan rule and certain FR Y-14 reporting requirements. The supervisory stress tests are forward-looking quantitative evaluations of the impact of stressful economic and financial market conditions on the Bancorp’s capital. The Bancorp became subject to Category IV standards on December 31, 2019, and the requirements outlined above apply to the stress test cycle that started on January 1, 2020. The Bancorp was not subject to the 2023 supervisory stress test conducted by the FRB, but submitted the Board-approved capital plan and information contained in Schedule C - Regulatory Capital Instruments as required by the April 5, 2023 deadline.

The Bancorp maintains a comprehensive process for managing capital that considers the current and forward-looking macroeconomic and regulatory environments and makes capital distributions that are consistent with the requirements in the FRB’s capital plan rule, inclusive of the Bancorp’s stress capital buffer requirement.

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 and 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 $0.33 and $0.30 for the three months ended June 30, 2023 and 2022, respectively, and $0.66 and $0.60 for the six months ended June 30, 2023 and 2022, respectively. Pursuant to the Bancorp’s Board-approved capital plan, during the first quarter of 2023, the Bancorp entered into and settled an accelerated share repurchase transaction in the amount of $200 million. Refer to Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information on share repurchase activity. The Bancorp did not enter into an ASR transaction during the second quarter of 2023. The Bancorp does not currently expect to repurchase any common stock, except pursuant to employee compensation plans, during the third quarter of 2023.


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

The following table summarizes the monthly share repurchase activity for the three months ended June 30, 2023:


TABLE 59: Share Repurchases
Period	Total Number of Shares Purchased(a)	Average Price Paid per Share		Total Number of Shares Purchased as a Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs(b)
April 1 - April 30, 2023	65,938	$	26.50	—	32,115,811
May 1 - May 31, 2023	49,694	24.37		—	32,115,811
June 1 - June 30, 2023	18,778	26.07		—	32,115,811
Total	134,410	$	25.66	—	32,115,811

(a) Shares repurchased during the periods presented were in connection with various employee compensation plans. These purchases do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.

(b) On June 18, 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. This authorization did not include specific targets or an expiration date.

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Quantitative and Qualitative Disclosures about Market Risk (Item 3)

Information presented in the Interest Rate and Price Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. This information contains certain statements that the Bancorp believes are forward-looking statements. Refer to page 1 for cautionary information regarding forward-looking statements.


Controls and Procedures (Item 4)

The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on the foregoing, as of the end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to the Bancorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Bancorp’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal control over financial reporting. Based on this evaluation there has been no such change during the period covered by this report.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (Item 1)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
	As of
	June 30,		December 31,
($ in millions, except share data)	2023		2022
Assets
Cash and due from banks	$	2,594	3,466
Other short-term investments(a)	10,943		8,351
Available-for-sale debt and other securities(b)	49,329		51,503
Held-to-maturity securities(c)	2		5
Trading debt securities	1,139		414
Equity securities	331		317
Loans and leases held for sale(d)	760		1,007
Portfolio loans and leases(a)(e)	121,891		121,480
Allowance for loan and lease losses(a)	(2,327)		(2,194)
Portfolio loans and leases, net	119,564		119,286
Bank premises and equipment(f)	2,275		2,187
Operating lease equipment	537		627
Goodwill	4,919		4,915
Intangible assets	146		169
Servicing rights	1,764		1,746
Other assets(a)	12,973		13,459
Total Assets	$	207,276	207,452
Liabilities
Deposits:
Noninterest-bearing deposits	$	45,264	53,125
Interest-bearing deposits	118,864		110,565
Total deposits	164,128		163,690
Federal funds purchased	163		180
Other short-term borrowings	5,817		4,838
Accrued taxes, interest and expenses	1,765		1,822
Other liabilities(a)	5,316		5,881
Long-term debt(a)	12,278		13,714
Total Liabilities	$	189,467	190,125
Equity
Common stock(g)	$	2,051	2,051
Preferred stock(h)	2,116		2,116
Capital surplus	3,708		3,684
Retained earnings	22,366		21,689
Accumulated other comprehensive loss	(5,166)		(5,110)
Treasury stock(g)	(7,266)		(7,103)
Total Equity	$	17,809	17,327
Total Liabilities and Equity	$	207,276	207,452

(a)Includes $1 and $17 of other short-term investments, $42 and $185 of portfolio loans and leases, $(1) and $(2) of ALLL, $0 and $2 of other assets, $9 and $9 of other liabilities, and $37 and $118 of long-term debt from consolidated VIEs that are included in their respective captions above at June 30, 2023 and December 31, 2022, respectively. For further information, refer to Note 11.

(b)Amortized cost of $55,399 and $57,530 at June 30, 2023 and December 31, 2022, respectively.

(c)Fair value of $2 and $5 at June 30, 2023 and December 31, 2022, respectively.

(d)Includes $596 and $600 of residential mortgage loans held for sale measured at fair value at June 30, 2023 and December 31, 2022, respectively.

(e)Includes $124 and $123 of residential mortgage loans measured at fair value at June 30, 2023 and December 31, 2022, respectively.

(f)Includes $22 and $24 of bank premises and equipment held for sale at June 30, 2023 and December 31, 2022, respectively.

(g)Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at June 30, 2023 – 680,850,480 (excludes 243,042,101 treasury shares), December 31, 2022 – 683,385,880 (excludes 240,506,701 treasury shares).

(h)500,000 shares of no par value preferred stock were authorized at both June 30, 2023 and December 31, 2022. There were 422,000 unissued shares of undesignated no par value preferred stock at both June 30, 2023 and December 31, 2022. Each issued share of no par value preferred stock has a liquidation preference of $25,000. 500,000 shares of no par value Class B preferred stock were authorized at both June 30, 2023 and December 31, 2022. There were 300,000 unissued shares of undesignated no par value Class B preferred stock at both June 30, 2023 and December 31, 2022. Each issued share of no par value Class B preferred stock has a liquidation preference of $1,000.

Refer to the Notes to Condensed Consolidated Financial Statements.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
	For the three months ended June 30,			For the six months ended June 30,
($ in millions, except share data)	2023		2022	2023	2022
Interest Income
Interest and fees on loans and leases	$	1,831	1,081	3,545	2,062
Interest on securities	437		369	876	663
Interest on other short-term investments	102		14	162	27
Total interest income	2,370		1,464	4,583	2,752
Interest Expense
Interest on deposits	655		25	1,133	36
Interest on federal funds purchased	5		1	10	1
Interest on other short-term borrowings	90		12	147	13
Interest on long-term debt	163		87	319	168
Total interest expense	913		125	1,609	218
Net Interest Income	1,457		1,339	2,974	2,534
Provision for credit losses	177		179	341	224
Net Interest Income After Provision for Credit Losses	1,280		1,160	2,633	2,310
Noninterest Income
Commercial banking revenue	146		137	307	272
Wealth and asset management revenue	143		140	289	289
Service charges on deposits	144		154	281	306
Card and processing revenue	106		105	206	201
Mortgage banking net revenue	59		31	127	83
Leasing business revenue	47		56	104	118
Other noninterest income	74		85	97	138
Securities gains (losses), net	7		(32)	11	(47)
Securities losses, net – non-qualifying hedges on mortgage servicing rights	—		—	—	(1)
Total noninterest income	726		676	1,422	1,359
Noninterest Expense
Compensation and benefits	650		584	1,407	1,295
Technology and communications	114		98	232	199
Net occupancy expense	83		75	164	152
Equipment expense	36		36	73	72
Leasing business expense	31		31	65	63
Marketing expense	31		28	60	52
Card and processing expense	20		20	42	38
Other noninterest expense	266		240	519	463
Total noninterest expense	1,231		1,112	2,562	2,334
Income Before Income Taxes	775		724	1,493	1,335
Applicable income tax expense	174		162	334	279
Net Income	601		562	1,159	1,056
Dividends on preferred stock	39		36	62	56
Net Income Available to Common Shareholders	$	562	526	1,097	1,000
Earnings per share - basic	$	0.82	0.76	1.60	1.45
Earnings per share - diluted	$	0.82	0.76	1.59	1.44
Average common shares outstanding - basic	684,028,603		689,018,541	684,023,063	688,282,355
Average common shares outstanding - diluted	686,385,938		694,804,715	687,967,395	695,519,583

Refer to the Notes to Condensed Consolidated Financial Statements.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Net Income	$	601	562	1,159	1,056
Other Comprehensive Income (Loss), Net of Tax:
Net unrealized losses on available-for-sale debt securities:
Unrealized holding losses arising during period	(633)		(1,506)	(33)	(3,435)
Reclassification adjustment for net gains included in net income	—		—	—	(2)
Net unrealized losses on cash flow hedge derivatives:
Unrealized holding (losses) gains arising during period	(352)		2	(137)	(310)
Reclassification adjustment for net losses (gains) included in net income	63		(45)	113	(106)
Defined benefit pension plans, net:
Net actuarial loss arising during the year	—		(1)	—	(1)
Reclassification of amounts to net periodic benefit costs	1		2	1	3
Other comprehensive loss, net of tax	(921)		(1,548)	(56)	(3,851)
Comprehensive Income (Loss)	$	(320)	(986)	1,103	(2,795)

Refer to the Notes to Condensed Consolidated Financial Statements.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
($ in millions, except per share data)	Common Stock		Preferred Stock	Capital Surplus	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock	Total Equity
Balance at March 31, 2022	$	2,051	2,116	3,615	20,501	(1,096)	(7,010)	20,177
Net income					562			562
Other comprehensive loss, net of tax						(1,548)		(1,548)
Cash dividends declared:
Common stock ($0.30 per share)					(209)			(209)
Preferred stock:
Series H ($637.50 per share)					(15)			(15)
Series I ($414.06 per share)					(8)			(8)
Series J ($261.40 per share)					(3)			(3)
Series K ($309.38 per share)					(3)			(3)
Series L ($281.25 per share)					(4)			(4)
Class B, Series A ($15.00 per share)					(3)			(3)

Impact of stock transactions under stock compensation plans, net				21			3	24

Balance at June 30, 2022	$	2,051	2,116	3,636	20,818	(2,644)	(7,007)	18,970

Balance at March 31, 2023	$	2,051	2,116	3,682	22,032	(4,245)	(7,272)	18,364


Net income					601			601
Other comprehensive loss, net of tax						(921)		(921)
Cash dividends declared:
Common stock ($0.33 per share)					(228)			(228)
Preferred stock:
Series H ($637.50 per share)					(15)			(15)
Series I ($414.06 per share)					(8)			(8)
Series J ($523.71 per share)					(6)			(6)
Series K ($309.38 per share)					(3)			(3)
Series L ($281.25 per share)					(4)			(4)
Class B, Series A ($15.00 per share)					(3)			(3)

Impact of stock transactions under stock compensation plans, net				26			6	32

Balance at June 30, 2023	$	2,051	2,116	3,708	22,366	(5,166)	(7,266)	17,809

Refer to the Notes to Condensed Consolidated Financial Statements.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
($ in millions, except per share data)	Common Stock		Preferred Stock	Capital Surplus	Retained Earnings	Accumulated Other Comprehensive (Loss) Income	Treasury Stock	Total Equity
Balance at December 31, 2021	$	2,051	2,116	3,624	20,236	1,207	(7,024)	22,210
Net income					1,056			1,056
Other comprehensive loss, net of tax						(3,851)		(3,851)
Cash dividends declared:
Common stock ($0.60 per share)					(418)			(418)
Preferred stock:
Series H ($637.50 per share)					(15)			(15)
Series I ($828.12 per share)					(15)			(15)
Series J ($470.87 per share)					(6)			(6)
Series K ($618.75 per share)					(6)			(6)
Series L ($562.50 per share)					(8)			(8)
Class B, Series A ($30.00 per share)					(6)			(6)

Impact of stock transactions under stock compensation plans, net				12			17	29

Balance at June 30, 2022	$	2,051	2,116	3,636	20,818	(2,644)	(7,007)	18,970

Balance at December 31, 2022	$	2,051	2,116	3,684	21,689	(5,110)	(7,103)	17,327
Impact of cumulative effect of change in accounting principle(a)					37			37
Balance at January 1, 2023	$	2,051	2,116	3,684	21,726	(5,110)	(7,103)	17,364
Net income					1,159			1,159
Other comprehensive loss, net of tax						(56)		(56)
Cash dividends declared:
Common stock ($0.66 per share)					(457)			(457)
Preferred stock:
Series H ($637.50 per share)					(15)			(15)
Series I ($828.12 per share)					(15)			(15)
Series J ($1,016.46 per share)					(12)			(12)
Series K ($618.75 per share)					(6)			(6)
Series L ($562.50 per share)					(8)			(8)
Class B, Series A ($30.00 per share)					(6)			(6)
Shares acquired for treasury							(201)	(201)
Impact of stock transactions under stock compensation plans, net				24			38	62

Balance at June 30, 2023	$	2,051	2,116	3,708	22,366	(5,166)	(7,266)	17,809

(a)Related to the adoption of ASU 2022-02 as of January 1, 2023. Refer to Note 3 for additional information.

Refer to the Notes to Condensed Consolidated Financial Statements.

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Fifth Third Bancorp and Subsidiaries Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
	For the six months ended June 30,
($ in millions)	2023		2022
Operating Activities
Net income	$	1,159	1,056
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	341		224
Depreciation, amortization and accretion	232		218
Stock-based compensation expense	111		107
(Benefit from) provision for deferred income taxes	(127)		6
Securities (gains) losses, net	(11)		52
MSR fair value adjustment	40		(169)
Net gains on sales of loans and fair value adjustments on loans held for sale	(18)		(68)
Net gains on disposition and impairment of bank premises and equipment and operating lease equipment	(1)		(4)
Proceeds from sales of loans held for sale	2,557		6,463
Loans originated or purchased for sale, net of repayments	(2,289)		(5,022)
Dividends representing return on equity investments	26		17
Net change in:
Equity and trading debt securities	(121)		215
Other assets	82		357
Accrued taxes, interest and expenses and other liabilities	(180)		(807)
Net Cash Provided by Operating Activities	1,801		2,645
Investing Activities
Proceeds from sales:
AFS securities and other investments	2,469		3,259
Loans and leases	41		94
Bank premises and equipment	3		1
Proceeds from repayments / maturities of AFS and HTM securities and other investments	2,084		2,776
Purchases:
AFS securities and other investments	(3,167)		(25,335)
Bank premises and equipment	(248)		(143)
MSRs	(23)		(191)
Proceeds from settlement of BOLI	9		31
Proceeds from sales and dividends representing return of equity investments	60		45
Net cash received for divestitures	—		46
Net cash paid on acquisitions	—		(918)
Net change in:
Other short-term investments	(2,592)		27,156
Portfolio loans and leases	(630)		(6,155)
Operating lease equipment	32		(39)
Net Cash (Used in) Provided by Investing Activities	(1,962)		627
Financing Activities
Net change in deposits	438		(8,151)
Net change in other short-term borrowings and federal funds purchased	1,058		6,507
Dividends paid on common and preferred stock	(559)		(472)
Proceeds from issuance of long-term debt	35		1,007
Repayment of long-term debt	(1,433)		(1,642)
Repurchases of treasury stock and related forward contract	(200)		—

Other	(50)		(78)
Net Cash Used in Financing Activities	(711)		(2,829)
(Decrease) Increase in Cash and Due from Banks	(872)		443
Cash and Due from Banks at Beginning of Period	3,466		2,994
Cash and Due from Banks at End of Period	$	2,594	3,437

Refer to the Notes to Condensed Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to non-cash investing and financing activities.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method and not consolidated. The investments in those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at fair value unless the investment does not have a readily determinable fair value. The Bancorp accounts for equity investments without a readily determinable fair value using the measurement alternative to fair value, representing the cost of the investment minus any impairment recorded and plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. Intercompany transactions and balances among consolidated entities have been eliminated.

In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, which consist of normal recurring accruals, necessary to present fairly the results for the periods presented. In accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements and it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Bancorp’s Annual Report on Form 10-K. The results of operations, comprehensive income and changes in equity for the three and six months ended June 30, 2023 and 2022 and the cash flows for the six months ended June 30, 2023 and 2022 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2022 has been derived from the Bancorp’s Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

2. Supplemental Cash Flow Information

Cash payments related to interest and income taxes in addition to non-cash investing and financing activities are presented in the following table for the six months ended June 30:


($ in millions)	2023		2022
Cash Payments:
Interest	$	1,474	205
Income taxes	337		52

Transfers:
Portfolio loans and leases to loans and leases held for sale	$	67	73
Loans and leases held for sale to portfolio loans and leases	5		403
Portfolio loans and leases to OREO	5		3

Bank premises and equipment to OREO	14		18

Supplemental Disclosures:
Net additions to lease liabilities under operating leases	$	32	77
Net (reductions) additions to lease liabilities under finance leases	(1)		15

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

3. Accounting and Reporting Developments

Standards Adopted in 2023

The Bancorp adopted the following new accounting standards during the six months ended June 30, 2023:

ASU 2021-08 – Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

In October 2021, the FASB issued ASU 2021-08, which provides guidance on the accounting for revenue contracts with customers which are acquired in a business combination. The amendments generally state that an acquirer accounts for an acquired revenue contract with a customer as if it had originated the contract. The amendments also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis and will apply the amendments for business combinations occurring on or after the adoption date. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.

ASU 2022-01 – Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method

In March 2022, the FASB issued ASU 2022-01, which clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and renames the last-of-layer method the portfolio layer method. Under previous guidance, the last-of-layer method enabled an entity to apply fair value hedging to a stated amount of a closed portfolio of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. ASU 2022-01 expands the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. It allows entities to designate multiple layers within a single closed portfolio as individual hedged items. Further, ASU 2022-01 clarifies that the fair value basis adjustments should be adjusted at the portfolio level and should not be allocated to individual assets within the portfolio. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis, except for the amendments related to fair value basis adjustments that, if applicable, were required to be applied on a modified retrospective basis. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.

ASU 2022-02 – Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

In March 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40, amends the guidance on calculating the allowance for credit losses for restructured financing receivables and requires entities to evaluate all receivable modifications under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or the continuation of an existing loan. The amended guidance adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amended guidance also requires disclosure of current period gross charge-offs by year of origination within the vintage disclosures required by ASC 326. The Bancorp adopted the amended guidance on January 1, 2023 on a prospective basis, except for the amendments impacting the measurement of the ACL for TDRs and reasonably expected TDRs, which were adopted on a modified retrospective basis. Upon adoption, the Bancorp recorded a decrease to the ACL of $49 million and a cumulative-effect adjustment to retained earnings of $37 million, net of tax. This adjustment was primarily attributable to the removal of the requirement to use a discounted cash flow approach to measure the impact of certain concessions granted as part of a TDR and the removal of the requirement to consider the impacts of reasonably expected TDRs when estimating expected credit losses. The required disclosures are included in Note 6.

ASU 2022-04 – Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued ASU 2022-04, which provides guidance on the disclosure requirements for supplier finance programs. The amendments require that a buyer in a supplier finance program disclose sufficient qualitative and quantitative information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The Bancorp adopted the amended guidance on January 1, 2023 on a retrospective basis, except for the amendments related to disclosure of rollforward information, which are required to be adopted on January 1, 2024 on a prospective basis. The adoption of the amended guidance did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.

Significant Accounting Standards Issued but Not Yet Adopted

The following significant accounting standards were issued but not yet adopted by the Bancorp as of June 30, 2023:

ASU 2022-03 – Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

In June 2022, the FASB issued ASU 2022-03, which clarifies the guidance in ASC 820 on the fair value measurement of an equity security that is subject to contractual sale restrictions, stating that such restrictions are not considered part of the unit of account of the security and therefore are not considered in measuring fair value. The amended guidance also requires disclosure of the fair value of equity securities subject to contractual sale restrictions and certain additional information about those restrictions. The amended guidance is effective for the Bancorp on January 1, 2024, with early adoption permitted, and is to be applied prospectively.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

ASU 2023-02 – Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method

In March 2023, the FASB issued ASU 2023-02, which expands the permitted usage of the proportional amortization method to include additional tax credit investment programs beyond qualifying LIHTC structures if certain conditions are met. The amended guidance permits entities to make elections to apply the proportional amortization method on a program-by-program basis for qualifying programs and also makes certain amendments to measurement and disclosure guidance. The amended disclosure guidance applies to all investments within programs where the proportional amortization method has been elected, including investments within those programs which do not meet the criteria to permit application of the proportional amortization method. The amended guidance is effective for the Bancorp on January 1, 2024, with early adoption permitted, and is to be applied on a modified retrospective or retrospective basis, except for certain provisions affecting the measurement of existing LIHTC investments which may be applied prospectively. The Bancorp is in the process of evaluating the impact of the amended guidance on the Condensed Consolidated Financial Statements.

Reference Rate Reform and LIBOR Transition

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in the ASU apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, which clarified that the optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting also apply to derivatives that are affected by the discounting transition. The expedients and exceptions provided by the amendments did not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity had elected certain optional expedients. Subsequently, in December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in ASU 2020-04 (as amended) are effective for the Bancorp as of March 12, 2020 and may be applied through December 31, 2024. The Bancorp has utilized the optional expedients and exceptions in accounting for certain eligible contract modifications, existing hedging relationships and new hedging relationships as part of its LIBOR transition activities.

In March 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law. The LIBOR Act offers a federal solution for transitioning legacy instruments that lack sufficient provisions addressing LIBOR’s cessation by outlining a uniform process to govern the transition from LIBOR to a replacement rate. The FRB issued final regulations to carry out the terms of the LIBOR Act, which became effective on February 27, 2023. Under the LIBOR Act and the related regulations, three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% was designated as the replacement reference rate for instruments that previously referenced three-month U.S. dollar LIBOR. As further discussed in Note 15 and Note 16, certain of the Bancorp’s long-term debt and preferred stock instruments have transitioned to new reference rates under these provisions.

Updates to Significant Accounting and Reporting Policies

In conjunction with the adoption of ASU 2022-02 on January 1, 2023, the Bancorp has updated its accounting and reporting policies for nonaccrual loans and leases, loan modifications and the ALLL as described below. Refer to Note 1 of the Notes to Consolidated Financial Statements in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for discussion of these accounting and reporting policies for periods prior to January 1, 2023.

Portfolio loans and leases - nonaccrual loans and leases

The Bancorp places loans and leases on nonaccrual status when full repayment of principal and interest is not expected, unless the loan or lease is well-secured and in the process of collection. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premium, accretion of loan discount and amortization/accretion of deferred net direct loan origination fees or costs are discontinued and all previously accrued and unpaid interest is reversed against income. The Bancorp utilizes the following policies to determine when full repayment of principal and interest on a loan or lease is not expected:

•Commercial loans are placed on nonaccrual status when there is a clear indication that the borrower’s cash flows may not be sufficient to meet payments as they become due. Commercial loans where the principal or interest has been in default for a period of 90 days or more are generally maintained on nonaccrual status unless the loan is fully or partially guaranteed by a government agency or otherwise considered to be well-secured and in the process of collection.

•Residential mortgage loans are placed on nonaccrual status when principal and interest payments become past due 150 days or more, unless repayment of the loan is fully or partially guaranteed by a government agency. Residential mortgage loans may stay on nonaccrual status for an extended time as the foreclosure process typically lasts longer than 180 days. The Bancorp maintains a reserve for the portion of accrued interest receivable that it estimates will be uncollectible, at the portfolio level, for residential mortgage loans which are past due 90 days or more and on accrual status. This reserve is recorded as a component of other assets on the Bancorp’s Condensed Consolidated Balance Sheets, consistent with the classification of the related accrued interest receivable.

•Home equity loans and lines of credit are placed on nonaccrual status if principal or interest has been in default for 90 days or more. Home equity loans and lines of credit that have been in default for 60 days or more are also placed on nonaccrual status if the senior lien has been in default 120 days or more.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

•Credit card loans that have been modified for a borrower experiencing financial difficulty are placed on nonaccrual status at the time of the modification. Subsequent to the modification, accounts are placed on nonaccrual status when required payments become past due 90 days or more in accordance with the modified terms.

•Indirect secured consumer loans and other consumer loans are generally placed on nonaccrual status when principal or interest becomes past due 90 days or more.

•Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower are placed on nonaccrual status and considered collateral-dependent loans at the time of discharge, regardless of the borrower’s payment history or capacity to repay in the future.

Well-secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from the sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance in the near future.

Nonaccrual loans and leases may be returned to accrual status when all delinquent principal and interest payments become current in accordance with the loan agreement and the remaining principal and interest payments are reasonably assured of repayment in accordance with the contractual terms of the loan agreement, or when the loan is both well-secured and in the process of collection. Nonaccrual loans that have been modified for a borrower experiencing financial difficulty may not be returned to accrual status unless such loans have sustained repayment performance of six months or more and are reasonably assured of repayment in accordance with the modified terms. Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower may be returned to accrual status provided there is a sustained payment history of twelve months or more after bankruptcy and collectability is reasonably assured for all remaining contractual payments.

Except for loans discharged in a Chapter 7 bankruptcy that are not reaffirmed by the borrower, accruing residential mortgage loans, home equity loans and lines of credit, indirect secured consumer loans and other consumer loans modified for borrowers experiencing financial difficulty are maintained on accrual status, provided there is reasonable assurance of repayment and of performance according to the modified terms based upon a current, well-documented credit evaluation. Accruing commercial loans modified for borrowers experiencing financial difficulty are maintained on accrual status provided there is a sustained payment history of six months or more prior to the modification and collectability is reasonably assured for all remaining contractual payments under the modified terms. Modifications of commercial loans and credit card loans for borrowers experiencing financial difficulty that do not have a sustained payment history of six months or more in accordance with their modified terms remain on nonaccrual status until a six-month payment history is sustained.

Nonaccrual loans and leases are generally accounted for on the cost recovery method due to the existence of doubt as to the collectability of the remaining amortized cost basis of nonaccrual assets. Under the cost recovery method, any payments received are applied to reduce principal. Once the entire amortized cost basis is collected, additional payments received are treated as recoveries of amounts previously charged-off until recovered in full, and any subsequent payments are treated as interest income. In certain circumstances when the remaining amortized cost basis of a nonaccrual loan or lease is deemed to be fully collectible, the Bancorp may utilize the cash basis method to account for interest payments received on a nonaccrual loan or lease. Under the cash basis method, interest income is recognized when cash is received, to the extent such income would have been accrued on the loan’s remaining balance at the contractual rate.

The Bancorp records a charge-off to the ALLL when all or a portion of a loan or lease is deemed to be uncollectible, after considering the net realizable value of any underlying collateral. Commercial loans and leases on nonaccrual status and criticized commercial loans with aggregate borrower relationships exceeding $1 million are subject to an individual review to identify charge-offs. The Bancorp does not have an established delinquency threshold for partially or fully charging off commercial loans and leases. The Bancorp records charge-offs on consumer loans in accordance with applicable regulatory guidelines, which are primarily based on a loan’s delinquency status.

Portfolio loans and leases - loan modifications

In circumstances where an existing loan is modified (including a restructuring, refinancing, or other changes in terms which affect the loan’s contractual cash flows), the Bancorp evaluates whether the modification results in a continuation of the existing loan or the origination of a new loan. The Bancorp accounts for a modification as a new loan if the terms of the modified loan are at least as favorable to the Bancorp as the terms for comparable loans to other borrowers with similar collection risks who are obtaining new loans, or if the modification of terms is considered more than minor. If neither of these conditions are met, then the Bancorp will account for the loan as a continuation of the existing loan. When a modification is accounted for as a new loan, any unamortized net deferred fees or costs from the original loan are recognized in interest income when the new loan is originated. When a modification is accounted for as a continuation of the existing loan, the unamortized net deferred fees or costs from the original loan and any additional incremental direct fees and costs are carried forward and deferred as part of the amortized cost basis of the modified loan.

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. Classes within the commercial portfolio segment include commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

construction and commercial leasing. The residential mortgage portfolio segment is also considered a class. Classes within the consumer portfolio segment include home equity, indirect secured consumer, credit card and other consumer loans.

The Bancorp’s methodology for determining the ALLL includes an estimate of expected credit losses on a collective basis for groups of loans and leases with similar risk characteristics and specific allowances for loans and leases which are individually evaluated.

Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million on nonaccrual status are individually evaluated for an ALLL. 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 (including modifications, if any) and other factors when determining the amount of the ALLL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, 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 loans and leases are individually evaluated, 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 individually evaluated loans and leases that are collateral-dependent are measured based on the fair value of the underlying collateral, less expected costs to sell where applicable. Individually evaluated loans and leases that are not collateral-dependent are measured based on the observable market value of the loan or lease or the present value of expected cash flows, discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans and leases are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The Bancorp also considers qualitative factors in determining the ALLL. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but are not fully captured within the Bancorp’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers, and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within the Bancorp’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on the Bancorp’s customers.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

4. Investment Securities

The following tables provide the amortized cost, unrealized gains and losses and fair value for the major categories of the available-for-sale debt and other securities and held-to-maturity securities portfolios as of:


June 30, 2023 ($ in millions)	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
Available-for-sale debt and other securities:
U.S. Treasury and federal agencies securities	$	2,924	—	(184)	2,740
Obligations of states and political subdivisions securities	2		—	—	2
Mortgage-backed securities:
Agency residential mortgage-backed securities	11,959		—	(1,378)	10,581
Agency commercial mortgage-backed securities	29,125		3	(3,581)	25,547
Non-agency commercial mortgage-backed securities	5,027		—	(538)	4,489
Asset-backed securities and other debt securities	5,526		3	(395)	5,134
Other securities(a)	836		—	—	836
Total available-for-sale debt and other securities	$	55,399	6	(6,076)	49,329
Held-to-maturity securities:
Asset-backed securities and other debt securities	$	2	—	—	2
Total held-to-maturity securities	$	2	—	—	2

(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $339, $493 and $4, respectively, at June 30, 2023, that are carried at cost.


December 31, 2022 ($ in millions)	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
Available-for-sale debt and other securities:
U.S. Treasury and federal agencies securities	$	2,683	—	(188)	2,495
Obligations of states and political subdivisions securities	18		—	—	18
Mortgage-backed securities:
Agency residential mortgage-backed securities	12,604		5	(1,372)	11,237
Agency commercial mortgage-backed securities	29,824		11	(3,513)	26,322
Non-agency commercial mortgage-backed securities	5,235		—	(520)	4,715
Asset-backed securities and other debt securities	6,292		3	(453)	5,842
Other securities(a)	874		—	—	874
Total available-for-sale debt and other securities	$	57,530	19	(6,046)	51,503
Held-to-maturity securities:
Obligations of states and political subdivisions securities	$	3	—	—	3
Asset-backed securities and other debt securities	2		—	—	2
Total held-to-maturity securities	$	5	—	—	5

(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $381, $491 and $2, respectively, at December 31, 2022, that are carried at cost.

The following table provides the fair value of trading debt securities and equity securities as of:


($ in millions)	June 30, 2023		December 31, 2022
Trading debt securities	$	1,139	414
Equity securities	331		317

The amounts reported in the preceding tables exclude accrued interest receivable on investment securities of $131 million at both June 30, 2023 and December 31, 2022 which is presented as a component of other assets in the Condensed Consolidated Balance Sheets.

The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity risk management. As part of managing interest rate risk, the Bancorp acquires securities as a component of its MSR non-qualifying hedging strategy, with net gains or losses recorded in securities losses, net – non-qualifying hedges on mortgage servicing rights in the Condensed Consolidated Statements of Income.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents the components of net securities gains and losses recognized in the Condensed Consolidated Statements of Income, including those recognized related to the Bancorp’s non-qualifying hedging strategy for MSRs:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Available-for-sale debt and other securities:
Realized gains	$	4	9	34	12
Realized losses	—		(9)	(30)	(9)
Impairment losses	(4)		—	(4)	—
Net realized gains on available-for-sale debt and other securities	$	—	—	—	3
Trading debt securities:
Net realized losses	—		—	—	(1)
Net unrealized gains	2		—	2	11
Net trading debt securities gains	$	2	—	2	10
Equity securities:
Net realized gains	1		—	2	1
Net unrealized gains (losses)	4		(32)	7	(62)
Net equity securities gains (losses)	$	5	(32)	9	(61)
Total gains (losses) recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities(a)	$	7	(32)	11	(48)

(a)Excludes $1 of net securities losses and an immaterial amount of net securities gains for the three and six months ended June 30, 2023, respectively, and $1 and $4 of net securities losses for the three and six months ended June 30, 2022, respectively, related to securities held by FTS to facilitate the timely execution of customer transactions. These losses and gains are included in commercial banking revenue and wealth and asset management revenue in the Condensed Consolidated Statements of Income.

The Bancorp recognized impairment losses on available-for-sale debt and other securities of $4 million during the second quarter of 2023. These losses were included in securities gains (losses), net, in the Condensed Consolidated Statements of Income. These losses related to certain securities in unrealized loss positions where the Bancorp determined that recovery of the amortized cost basis of the securities was no longer probable.

At June 30, 2023 and December 31, 2022, investment securities with a fair value of $22.9 billion and $11.0 billion, respectively, were pledged to secure borrowing capacity, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.

The expected maturity distribution of the Bancorp’s mortgage-backed securities and the contractual maturity distribution of the remainder of the Bancorp’s available-for-sale debt and other securities and held-to-maturity securities as of June 30, 2023 are shown in the following table:


($ in millions)	Available-for-Sale Debt and Other			Held-to-Maturity
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Debt securities:(a)
Due in 1 year or less	$	142	141	—	—
Due after 1 year through 5 years	13,905		12,875	—	—
Due after 5 years through 10 years	30,307		26,677	—	—
Due after 10 years	10,209		8,800	2	2
Other securities	836		836	—	—
Total	$	55,399	49,329	2	2

(a)Actual maturities may differ from contractual maturities when a right to call or prepay obligations exists with or without call or prepayment penalties.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table provides the fair value and gross unrealized losses on available-for-sale debt and other securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of:


	Less than 12 months			12 months or more		Total
($ in millions)	Fair Value		Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
June 30, 2023
U.S. Treasury and federal agencies securities	$	654	(24)	1,686	(160)	2,340	(184)

Agency residential mortgage-backed securities	2,728		(213)	7,853	(1,165)	10,581	(1,378)
Agency commercial mortgage-backed securities	10,132		(961)	15,171	(2,620)	25,303	(3,581)
Non-agency commercial mortgage-backed securities	529		(30)	3,845	(508)	4,374	(538)
Asset-backed securities and other debt securities	870		(45)	4,042	(350)	4,912	(395)
Total	$	14,913	(1,273)	32,597	(4,803)	47,510	(6,076)
December 31, 2022
U.S. Treasury and federal agencies securities	$	2,400	(188)	—	—	2,400	(188)
Obligations of states and political subdivisions securities	—		—	1	—	1	—
Agency residential mortgage-backed securities	10,078		(1,170)	938	(202)	11,016	(1,372)
Agency commercial mortgage-backed securities	22,083		(2,487)	3,697	(1,026)	25,780	(3,513)
Non-agency commercial mortgage-backed securities	3,621		(272)	1,059	(248)	4,680	(520)
Asset-backed securities and other debt securities	3,164		(178)	2,495	(275)	5,659	(453)
Total	$	41,346	(4,295)	8,190	(1,751)	49,536	(6,046)

At June 30, 2023 and December 31, 2022, $41 million and $42 million, respectively, of unrealized losses in the available-for-sale debt and other securities portfolio were related to non-rated securities.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

5. Loans and Leases

The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. The Bancorp’s commercial loan and lease portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses that are expected to be incurred over the remaining contractual terms of the related loans and leases. For further information on credit quality and the ALLL, refer to Note 6.

The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of:


($ in millions)	June 30, 2023		December 31, 2022
Loans and leases held for sale:
Commercial and industrial loans	$	29	73


Commercial leases	3		—
Residential mortgage loans	728		934
Total loans and leases held for sale	$	760	1,007
Portfolio loans and leases:
Commercial and industrial loans	$	56,897	57,232
Commercial mortgage loans	11,310		11,020
Commercial construction loans	5,475		5,433
Commercial leases	2,670		2,704
Total commercial loans and leases	$	76,352	76,389
Residential mortgage loans	$	17,503	17,628
Home equity	3,911		4,039
Indirect secured consumer loans	16,097		16,552
Credit card	1,818		1,874
Other consumer loans	6,210		4,998
Total consumer loans	$	45,539	45,091
Total portfolio loans and leases	$	121,891	121,480

Portfolio loans and leases are recorded net of unearned income, which totaled $262 million and $238 million as of June 30, 2023 and December 31, 2022, respectively. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred direct loan origination fees and costs and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net discount of $226 million and net premium of $146 million as of June 30, 2023 and December 31, 2022, respectively. The amortized cost basis of loans and leases excludes accrued interest receivable of $566 million and $518 million at June 30, 2023 and December 31, 2022, respectively, which is presented as a component of other assets in the Condensed Consolidated Balance Sheets.

The Bancorp’s FHLB and FRB borrowings are primarily secured by loans. The Bancorp had loans of $15.8 billion and $15.9 billion as of June 30, 2023 and December 31, 2022, respectively, pledged to the FHLB, and loans of $55.4 billion and $57.1 billion at June 30, 2023 and December 31, 2022, respectively, pledged to the FRB.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents a summary of the total loans and leases owned by the Bancorp as of:


	Carrying Value			90 Days Past Due and Still Accruing(a)
($ in millions)	June 30, 2023		December 31, 2022	June 30, 2023	December 31, 2022
Commercial and industrial loans	$	56,926	57,305	6	11
Commercial mortgage loans	11,310		11,020	20	—
Commercial construction loans	5,475		5,433	—	—
Commercial leases	2,673		2,704	—	2
Residential mortgage loans	18,231		18,562	7	7
Home equity	3,911		4,039	1	1
Indirect secured consumer loans	16,097		16,552	—	—
Credit card	1,818		1,874	17	18
Other consumer loans	6,210		4,998	—	1
Total loans and leases	$	122,651	122,487	51	40
Less: Loans and leases held for sale	760		1,007
Total portfolio loans and leases	$	121,891	121,480

(a)Excludes government guaranteed residential mortgage loans.

The following table presents a summary of net charge-offs (recoveries):


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Commercial and industrial loans	$	32	33	62	42
Commercial mortgage loans	—		—	—	(1)
Commercial construction loans	—		3	1	3

Residential mortgage loans	—		(1)	—	(1)
Home equity	1		—	—	(1)
Indirect secured consumer loans	16		5	29	13
Credit card	16		14	31	27
Other consumer loans	25		8	45	14
Total net charge-offs	$	90	62	168	96

The following table presents the components of the net investment in portfolio leases as of:


($ in millions)(a)	June 30, 2023		December 31, 2022
Net investment in direct financing leases:
Lease payment receivable (present value)	$	594	570
Unguaranteed residual assets (present value)	111		107

Net investment in sales-type leases:
Lease payment receivable (present value)	1,638		1,704
Unguaranteed residual assets (present value)	78		76

(a)Excludes $249 and $247 of leveraged leases at June 30, 2023 and December 31, 2022, respectively.

Interest income recognized in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2023 was $7 million and $13 million, respectively, for direct financing leases and $16 million and $31 million, respectively, for sales-type leases. For the three and six months ended June 30, 2022, interest income recognized was $7 million and $15 million, respectively, for direct financing leases and $12 million and $23 million, respectively, for sales-type leases.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents undiscounted cash flows for both direct financing and sales-type leases for the remainder of 2023 through 2028 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:


As of June 30, 2023 ($ in millions)	Direct Financing Leases		Sales-Type Leases
Remainder of 2023	$	110	250
2024	169		480
2025	124		419
2026	106		247
2027	66		185
2028	25		113
Thereafter	40		84
Total undiscounted cash flows	$	640	1,778
Less: Difference between undiscounted cash flows and discounted cash flows	46		140
Present value of lease payments (recognized as lease receivables)	$	594	1,638

The lease residual value represents the present value of the estimated fair value of the leased equipment at the end of the lease. The Bancorp performs quarterly reviews of residual values associated with its leasing portfolio considering factors such as the subject equipment, structure of the transaction, industry, prior experience with the lessee and other factors that impact the residual value to assess for impairment. The Bancorp maintained an allowance of $19 million and $15 million at June 30, 2023 and December 31, 2022, respectively, to cover the losses that are expected to be incurred over the remaining contractual terms of the related leases, including the potential losses related to the lease residual value. Refer to Note 6 for additional information on credit quality and the ALLL.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

6. Credit Quality and the Allowance for Loan and Lease Losses

The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.

Allowance for Loan and Lease Losses

The following tables summarize transactions in the ALLL by portfolio segment:


For the three months ended June 30, 2023 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	1,143	185	887	2,215

Losses charged off(a)	(35)		(1)	(85)	(121)
Recoveries of losses previously charged off(a)	3		1	27	31
Provision for (benefit from) loan and lease losses	88		(12)	126	202
Balance, end of period	$	1,199	173	955	2,327

(a)The Bancorp recorded $8 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.


For the three months ended June 30, 2022 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	1,110	239	559	1,908
Losses charged off(a)	(37)		—	(53)	(90)
Recoveries of losses previously charged off(a)	1		1	26	28
Provision for loan and lease losses	91		8	69	168
Balance, end of period	$	1,165	248	601	2,014

(a)The Bancorp recorded $7 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.


For the six months ended June 30, 2023 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	1,127	245	822	2,194
Impact of adoption of ASU 2022-02	4		(36)	(17)	(49)
Losses charged off(a)	(69)		(2)	(160)	(231)
Recoveries of losses previously charged off(a)	6		2	55	63
Provision for (benefit from) loan and lease losses	131		(36)	255	350
Balance, end of period	$	1,199	173	955	2,327

(a)The Bancorp recorded $17 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.


For the six months ended June 30, 2022 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
Balance, beginning of period	$	1,102	235	555	1,892
Losses charged off(a)	(48)		(1)	(105)	(154)
Recoveries of losses previously charged off(a)	4		2	52	58
Provision for loan and lease losses	107		12	99	218
Balance, end of period	$	1,165	248	601	2,014

(a)The Bancorp recorded $15 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:


As of June 30, 2023 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
ALLL:(a)
Individually evaluated	$	117	1	6	124
Collectively evaluated	1,082		172	949	2,203
Total ALLL	$	1,199	173	955	2,327
Portfolio loans and leases:(b)
Individually evaluated	$	322	132	73	527
Collectively evaluated	76,030		17,247	27,963	121,240
Total portfolio loans and leases	$	76,352	17,379	28,036	121,767

(a)Includes $2 related to commercial leveraged leases at June 30, 2023.

(b)Excludes $124 of residential mortgage loans measured at fair value and includes $249 of commercial leveraged leases, net of unearned income, at June 30, 2023.


As of December 31, 2022 ($ in millions)	Commercial		Residential Mortgage	Consumer	Total
ALLL:(a)
Individually evaluated	$	30	47	45	122
Collectively evaluated	1,097		198	777	2,072
Total ALLL	$	1,127	245	822	2,194
Portfolio loans and leases:(b)
Individually evaluated	$	531	560	297	1,388
Collectively evaluated	75,858		16,945	27,166	119,969

Total portfolio loans and leases	$	76,389	17,505	27,463	121,357

(a)Includes $2 related to commercial leveraged leases at December 31, 2022.

(b)Excludes $123 of residential mortgage loans measured at fair value and includes $247 of commercial leveraged leases, net of unearned income, at December 31, 2022.

CREDIT RISK PROFILE

Commercial Portfolio Segment

For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leases.

To facilitate the monitoring of credit quality within the commercial portfolio segment, the Bancorp utilizes the following categories of credit ratings: pass, special mention, substandard, doubtful and loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

Pass ratings, which are assigned to those borrowers that do not have identified potential or well-defined weaknesses and for which there is a high likelihood of orderly repayment, are updated at least annually based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.

The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorp’s credit position.

The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well-defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases with this rating also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Loans and leases classified as loss are considered uncollectible and are charged off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged off, they are not included in the following tables.

For loans and leases that are collectively evaluated for an ACL, the Bancorp utilizes models to forecast expected credit losses over a reasonable and supportable forecast period based on the probability of a loan or lease defaulting, the expected balance at the estimated date of default and the expected loss percentage given a default. For the commercial portfolio segment, the estimates for probability of default are primarily based on internal ratings assigned to each commercial borrower on a 13-point scale and historical observations of how those ratings migrate to a default over time in the context of macroeconomic conditions. For loans with available credit, the estimate of the expected balance at the time of default considers expected utilization rates, which are primarily based on macroeconomic conditions and the utilization history of similar borrowers under those economic conditions. The estimates for loss severity are primarily based on collateral type and coverage levels and the susceptibility of those characteristics to changes in macroeconomic conditions. For more information about the Bancorp’s processes for developing these models, estimating credit losses for periods beyond the reasonable and supportable forecast period and for estimating credit losses for individually evaluated loans, refer to Note 3.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present the amortized cost basis of the Bancorp’s commercial portfolio segment, by class and vintage, disaggregated by credit risk rating:


As of June 30, 2023 ($ in millions)	Term Loans and Leases by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2023		2022	2021	2020	2019	Prior			Total
Commercial and industrial loans:
Pass	$	1,355	4,066	2,310	769	350	521	43,756	—	53,127
Special mention	16		53	6	17	18	39	1,297	—	1,446
Substandard	104		156	64	205	58	107	1,630	—	2,324
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial and industrial loans	$	1,475	4,275	2,380	991	426	667	46,683	—	56,897
Commercial mortgage owner-occupied loans:
Pass	$	560	1,044	697	439	202	308	1,778	—	5,028
Special mention	27		7	20	3	1	11	22	—	91
Substandard	60		18	21	16	53	9	138	—	315
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial mortgage owner- occupied loans	$	647	1,069	738	458	256	328	1,938	—	5,434
Commercial mortgage nonowner-occupied loans:
Pass	$	349	1,004	335	421	352	315	2,638	—	5,414
Special mention	54		15	81	26	—	4	109	—	289
Substandard	27		29	8	18	1	17	73	—	173
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial mortgage nonowner-occupied loans	$	430	1,048	424	465	353	336	2,820	—	5,876
Commercial construction loans:
Pass	$	144	71	34	42	8	16	4,828	—	5,143
Special mention	—		—	—	—	—	—	126	—	126
Substandard	67		—	33	—	—	—	106	—	206
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial construction loans	$	211	71	67	42	8	16	5,060	—	5,475
Commercial leases:
Pass	$	334	460	567	242	170	785	—	—	2,558
Special mention	—		2	8	8	5	10	—	—	33
Substandard	10		11	14	3	3	38	—	—	79
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial leases	$	344	473	589	253	178	833	—	—	2,670
Total commercial loans and leases:
Pass	$	2,742	6,645	3,943	1,913	1,082	1,945	53,000	—	71,270
Special mention	97		77	115	54	24	64	1,554	—	1,985
Substandard	268		214	140	242	115	171	1,947	—	3,097
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial loans and leases	$	3,107	6,936	4,198	2,209	1,221	2,180	56,501	—	76,352

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


As of December 31, 2022 ($ in millions)	Term Loans and Leases by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2022		2021	2020	2019	2018	Prior			Total
Commercial and industrial loans:
Pass	$	3,825	3,098	994	445	269	488	44,521	—	53,640
Special mention	65		24	15	36	10	24	1,221	—	1,395
Substandard	150		77	233	26	7	107	1,597	—	2,197
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial and industrial loans	$	4,040	3,199	1,242	507	286	619	47,339	—	57,232
Commercial mortgage owner-occupied loans:
Pass	$	1,177	826	522	257	160	264	1,624	—	4,830
Special mention	17		15	13	12	13	2	56	—	128
Substandard	51		14	20	73	11	25	106	—	300
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial mortgage owner-occupied loans	$	1,245	855	555	342	184	291	1,786	—	5,258
Commercial mortgage nonowner-occupied loans:
Pass	$	1,127	462	490	397	220	170	2,453	—	5,319
Special mention	1		84	26	—	—	23	88	—	222
Substandard	65		19	18	1	1	17	100	—	221
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial mortgage nonowner-occupied loans	$	1,193	565	534	398	221	210	2,641	—	5,762
Commercial construction loans:
Pass	$	82	31	93	8	35	7	4,684	—	4,940
Special mention	—		—	—	—	—	—	293	—	293
Substandard	53		—	—	—	—	2	145	—	200
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial construction loans	$	135	31	93	8	35	9	5,122	—	5,433
Commercial leases:
Pass	$	584	664	306	192	146	696	—	—	2,588
Special mention	—		4	2	4	7	19	—	—	36
Substandard	1		20	2	4	21	32	—	—	80
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial leases	$	585	688	310	200	174	747	—	—	2,704
Total commercial loans and leases:
Pass	$	6,795	5,081	2,405	1,299	830	1,625	53,282	—	71,317
Special mention	83		127	56	52	30	68	1,658	—	2,074
Substandard	320		130	273	104	40	183	1,948	—	2,998
Doubtful	—		—	—	—	—	—	—	—	—
Total commercial loans and leases	$	7,198	5,338	2,734	1,455	900	1,876	56,888	—	76,389

The following table summarizes the Bancorp’s gross charge-offs within the commercial portfolio segment, by class and vintage:


For the six months ended June 30, 2023 ($ in millions)	Term Loans and Leases by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2023		2022	2021	2020	2019	Prior			Total
Commercial loans and leases:
Commercial and industrial loans	$	—	5	11	1	—	5	45	—	67
Commercial mortgage owner-occupied loans	—		—	—	—	—	—	1	—	1

Commercial construction loans	—		—	—	—	—	—	1	—	1

Total commercial loans and leases	$	—	5	11	1	—	5	47	—	69

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Age Analysis of Past Due Commercial Loans and Leases

The following tables summarize the Bancorp’s amortized cost basis in portfolio commercial loans and leases, by age and class:


	Current Loans and Leases(a)		Past Due			Total Loans and Leases	90 Days Past Due and Still Accruing
As of June 30, 2023 ($ in millions)			30-89 Days(a)	90 Days or More(a)	Total Past Due
Commercial loans and leases:
Commercial and industrial loans	$	56,748	79	70	149	56,897	6
Commercial mortgage owner-occupied loans	5,423		9	2	11	5,434	—
Commercial mortgage nonowner-occupied loans	5,835		21	20	41	5,876	20
Commercial construction loans	5,475		—	—	—	5,475	—
Commercial leases	2,654		15	1	16	2,670	—
Total portfolio commercial loans and leases	$	76,135	124	93	217	76,352	26

(a)Includes accrual and nonaccrual loans and leases.


	Current Loans and Leases(a)		Past Due			Total Loans and Leases	90 Days Past Due and Still Accruing
As of December 31, 2022 ($ in millions)			30-89 Days(a)	90 Days or More(a)	Total Past Due
Commercial loans and leases:
Commercial and industrial loans	$	57,092	98	42	140	57,232	11
Commercial mortgage owner-occupied loans	5,241		14	3	17	5,258	—
Commercial mortgage nonowner-occupied loans	5,756		6	—	6	5,762	—
Commercial construction loans	5,424		7	2	9	5,433	—
Commercial leases	2,698		4	2	6	2,704	2
Total portfolio commercial loans and leases	$	76,211	129	49	178	76,389	13

(a)Includes accrual and nonaccrual loans and leases.

Residential Mortgage and Consumer Portfolio Segments

For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Bancorp disaggregates the segment into the following classes: home equity, indirect secured consumer loans, credit card and other consumer loans. The Bancorp’s residential mortgage portfolio segment is also a separate class.

The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans and the performing versus nonperforming status are presented in the following tables.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present the amortized cost basis of the Bancorp’s residential mortgage and consumer portfolio segments, by class and vintage, disaggregated by both age and performing versus nonperforming status:


As of June 30, 2023 ($ in millions)	Term Loans by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2023		2022	2021	2020	2019	Prior			Total
Residential mortgage loans:
Performing:
Current(a)	$	631	3,202	5,231	2,840	998	4,317	—	—	17,219
30-89 days past due	—		2	3	4	—	10	—	—	19
90 days or more past due	—		1	1	—	—	5	—	—	7
Total performing	631		3,205	5,235	2,844	998	4,332	—	—	17,245
Nonperforming	—		4	4	5	4	117	—	—	134
Total residential mortgage loans(b)	$	631	3,209	5,239	2,849	1,002	4,449	—	—	17,379
Home equity:
Performing:
Current	$	35	44	3	6	13	102	3,596	26	3,825
30-89 days past due	—		—	—	—	—	1	23	—	24
90 days or more past due	—		—	—	—	—	1	—	—	1
Total performing	35		44	3	6	13	104	3,619	26	3,850
Nonperforming	—		—	—	—	—	7	53	1	61
Total home equity	$	35	44	3	6	13	111	3,672	27	3,911
Indirect secured consumer loans:
Performing:
Current	$	2,720	5,076	4,840	2,018	875	422	—	—	15,951
30-89 days past due	7		37	36	20	14	9	—	—	123
90 days or more past due	—		—	—	—	—	—	—	—	—
Total performing	2,727		5,113	4,876	2,038	889	431	—	—	16,074
Nonperforming	1		6	5	5	3	3	—	—	23
Total indirect secured consumer loans	$	2,728	5,119	4,881	2,043	892	434	—	—	16,097
Credit card:
Performing:
Current	$	—	—	—	—	—	—	1,751	—	1,751
30-89 days past due	—		—	—	—	—	—	20	—	20
90 days or more past due	—		—	—	—	—	—	17	—	17
Total performing	—		—	—	—	—	—	1,788	—	1,788
Nonperforming	—		—	—	—	—	—	30	—	30
Total credit card	$	—	—	—	—	—	—	1,818	—	1,818
Other consumer loans:
Performing:
Current	$	1,580	2,898	360	179	98	122	870	36	6,143
30-89 days past due	6		17	3	2	2	1	2	1	34
90 days or more past due	—		—	—	—	—	—	—	—	—
Total performing	1,586		2,915	363	181	100	123	872	37	6,177
Nonperforming	1		25	3	1	1	1	1	—	33
Total other consumer loans	$	1,587	2,940	366	182	101	124	873	37	6,210
Total residential mortgage and consumer loans:
Performing:
Current	$	4,966	11,220	10,434	5,043	1,984	4,963	6,217	62	44,889
30-89 days past due	13		56	42	26	16	21	45	1	220
90 days or more past due	—		1	1	—	—	6	17	—	25
Total performing	4,979		11,277	10,477	5,069	2,000	4,990	6,279	63	45,134
Nonperforming	2		35	12	11	8	128	84	1	281
Total residential mortgage and consumer loans(b)	$	4,981	11,312	10,489	5,080	2,008	5,118	6,363	64	45,415

(a)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 June 30, 2023, $73 of these loans were 30-89 days past due and $169 were 90 days or more past due. The Bancorp recognized $1 of losses during both the three and six months ended June 30, 2023, due to claim denials and curtailments associated with these insured or guaranteed loans.

(b)Excludes $124 of residential mortgage loans measured at fair value at June 30, 2023, including $3 of nonperforming loans.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


As of December 31, 2022 ($ in millions)	Term Loans by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2022		2021	2020	2019	2018	Prior			Total
Residential mortgage loans:
Performing:
Current(a)	$	3,195	5,440	2,981	1,051	344	4,336	—	—	17,347
30-89 days past due	4		4	3	1	2	15	—	—	29
90 days or more past due	—		—	1	—	1	5	—	—	7
Total performing	3,199		5,444	2,985	1,052	347	4,356	—	—	17,383
Nonperforming	—		3	4	4	7	104	—	—	122
Total residential mortgage loans(b)	$	3,199	5,447	2,989	1,056	354	4,460	—	—	17,505
Home equity:
Performing:
Current	$	46	3	7	15	17	94	3,741	18	3,941
30-89 days past due	—		—	—	—	—	2	28	—	30
90 days or more past due	—		—	—	—	—	1	—	—	1
Total performing	46		3	7	15	17	97	3,769	18	3,972
Nonperforming	—		—	—	—	—	8	58	1	67
Total home equity	$	46	3	7	15	17	105	3,827	19	4,039
Indirect secured consumer loans:
Performing:
Current	$	6,034	5,875	2,600	1,217	416	239	—	—	16,381
30-89 days past due	34		42	28	22	11	5	—	—	142
90 days or more past due	—		—	—	—	—	—	—	—	—
Total performing	6,068		5,917	2,628	1,239	427	244	—	—	16,523
Nonperforming	4		6	7	6	4	2	—	—	29
Total indirect secured consumer loans	$	6,072	5,923	2,635	1,245	431	246	—	—	16,552
Credit card:
Performing:
Current	$	—	—	—	—	—	—	1,808	—	1,808
30-89 days past due	—		—	—	—	—	—	21	—	21
90 days or more past due	—		—	—	—	—	—	18	—	18
Total performing	—		—	—	—	—	—	1,847	—	1,847
Nonperforming	—		—	—	—	—	—	27	—	27
Total credit card	$	—	—	—	—	—	—	1,874	—	1,874
Other consumer loans:
Performing:
Current	$	2,704	540	355	169	112	146	908	26	4,960
30-89 days past due	14		6	3	2	2	2	3	—	32
90 days or more past due	—		—	—	—	—	—	1	—	1
Total performing	2,718		546	358	171	114	148	912	26	4,993
Nonperforming	2		1	—	—	—	1	1	—	5
Total other consumer loans	$	2,720	547	358	171	114	149	913	26	4,998
Total residential mortgage and consumer loans:
Performing:
Current	$	11,979	11,858	5,943	2,452	889	4,815	6,457	44	44,437
30-89 days past due	52		52	34	25	15	24	52	—	254
90 days or more past due	—		—	1	—	1	6	19	—	27
Total performing	12,031		11,910	5,978	2,477	905	4,845	6,528	44	44,718
Nonperforming	6		10	11	10	11	115	86	1	250
Total residential mortgage and consumer loans(b)	$	12,037	11,920	5,989	2,487	916	4,960	6,614	45	44,968

(a)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, 2022, $81 of these loans were 30-89 days past due and $147 were 90 days or more past due. The Bancorp recognized $1 of losses during both the three and six months ended June 30, 2022 due to claim denials and curtailments associated with these insured or guaranteed loans.

(b)Excludes $123 of residential mortgage loans measured at fair value at December 31, 2022, including $1 of 30-89 days past due loans and $2 of nonperforming loans.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the Bancorp’s gross charge-offs within the residential mortgage and consumer portfolio segments, by class and vintage:


For the six months ended June 30, 2023 ($ in millions)	Term Loans by Origination Year							Revolving Loans	Revolving Loans Converted to Term Loans
	2023		2022	2021	2020	2019	Prior			Total
Residential mortgage loans	$	—	—	—	—	—	2	—	—	2
Consumer loans:
Home equity	—		—	—	—	—	1	3	—	4
Indirect secured consumer loans	1		18	12	7	5	5	—	—	48
Credit cards	—		—	—	—	—	—	40	—	40
Other consumer loans	—		25	10	6	4	6	16	1	68
Total residential mortgage and consumer loans	$	1	43	22	13	9	14	59	1	162

Collateral-Dependent Loans and Leases

The Bancorp considers a loan or lease to be collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When a loan or lease is collateral-dependent, its fair value is generally based on the fair value less cost to sell of the underlying collateral.

The following table presents the amortized cost basis of the Bancorp’s collateral-dependent loans and leases, by portfolio class, as of:


($ in millions)	June 30, 2023		December 31, 2022
Commercial loans and leases:
Commercial and industrial loans	$	252	433
Commercial mortgage owner-occupied loans	10		14
Commercial mortgage nonowner-occupied loans	2		27
Commercial construction loans	—		56
Commercial leases	—		1
Total commercial loans and leases	$	264	531
Residential mortgage loans	132		57
Consumer loans:
Home equity	59		46
Indirect secured consumer loans	14		6

Total consumer loans	$	73	52
Total portfolio loans and leases	$	469	640

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Nonperforming Assets

The following table presents the amortized cost basis of the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of:


	June 30, 2023				December 31, 2022
($ in millions)	With an ALLL		No Related ALLL	Total	With an ALLL	No Related ALLL	Total
Commercial loans and leases:
Commercial and industrial loans	$	303	19	322	114	101	215
Commercial mortgage owner-occupied loans	10		10	20	9	7	16
Commercial mortgage nonowner-occupied loans	—		2	2	20	4	24
Commercial construction loans	—		—	—	6	2	8
Commercial leases	—		1	1	—	—	—
Total nonaccrual portfolio commercial loans and leases	$	313	32	345	149	114	263
Residential mortgage loans	46		91	137	81	43	124
Consumer loans:
Home equity	21		40	61	45	22	67
Indirect secured consumer loans	21		2	23	26	3	29
Credit card	30		—	30	27	—	27
Other consumer loans	33		—	33	5	—	5
Total nonaccrual portfolio consumer loans	$	105	42	147	103	25	128
Total nonaccrual portfolio loans and leases(a)(b)	$	464	165	629	333	182	515
OREO and other repossessed property	—		32	32	—	24	24
Total nonperforming portfolio assets(a)(b)	$	464	197	661	333	206	539

(a)Excludes $2 and an immaterial amount of nonaccrual loans held for sale as of both June 30, 2023 and December 31, 2022.

(b)Includes $18 and $15 of nonaccrual government insured commercial loans whose repayments are insured by the SBA as of June 30, 2023 and December 31, 2022, respectively.

The Bancorp recognized an immaterial amount of interest income on nonaccrual loans and leases for both the three and six months ended June 30, 2023 and 2022.

The Bancorp’s amortized cost basis of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $159 million and $154 million as of June 30, 2023 and December 31, 2022, respectively.

Modifications to Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Bancorp adopted ASU 2022-02, which eliminated the recognition and measurement guidance for TDRs. The amended accounting and disclosure requirements are applicable to loan modifications to borrowers experiencing financial difficulty which are completed on or after the adoption date. For further information on the adoption of ASU 2022-02, refer to Note 3.

In the course of servicing its loans, the Bancorp works with borrowers who are experiencing financial difficulty to identify solutions that are mutually beneficial to both parties with the objective of mitigating the risk of losses on the loan. These efforts often result in modifications to the payment terms of the loan. The types of modifications offered to borrowers vary by type of loan and may include term extensions, interest rate reductions, payment delays (other than those that are insignificant) or combinations thereof. The Bancorp typically does not provide principal forgiveness except in circumstances where the loan has already been fully or partially charged off.

The Bancorp applies its expected credit loss models consistently to both modified and non-modified loans when estimating the ALLL. For loans which are modified for borrowers experiencing financial difficulty, there is generally not a significant change to the ALLL upon modification because the Bancorp’s ALLL estimation methodologies already consider those borrowers’ financial difficulties and the resulting effects of potential modifications when estimating expected credit losses.

As of June 30, 2023, portfolio loans with an amortized cost basis of $331 million and $444 million were modified during the three and six months ended June 30, 2023, respectively, for borrowers experiencing financial difficulty, as further discussed in the following sections. These modifications for the three and six months ended June 30, 2023 represented 0.27% and 0.36%, respectively, of total portfolio loans and leases as of June 30, 2023. These amounts excluded $9 million and $20 million of consumer and residential mortgage loans which have been granted a concession under provisions of the Federal Bankruptcy Act and are monitored separately from loans modified under the Bancorp’s loan modification programs for the three and six months ended June 30, 2023, respectively. As of June 30, 2023, the Bancorp had

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

commitments of $160 million to lend additional funds to borrowers experiencing financial difficulty whose terms have been modified during the six months ended June 30, 2023.

Commercial portfolio segment

Commercial loan modifications are individually negotiated and may vary depending on the borrower’s financial situation, but the Bancorp most commonly utilizes term extensions for periods of 3 to 12 months. In less common situations and when specifically warranted by the borrower’s situation, the Bancorp may also consider offering commercial borrowers interest rate reductions or payment deferrals, which may be combined with a term extension.

The following tables present the amortized cost basis of the Bancorp’s commercial portfolio loans that were modified for borrowers experiencing financial difficulty, by portfolio class and type of modification:


For the three months ended June 30, 2023 ($ in millions)	Term Extension		Interest Rate Reduction	Term Extension and Interest Rate Reduction	Payment Deferral	Total	% of Total Class
Commercial and industrial loans	$	163	—	—	7	170	0.30	%
Commercial mortgage owner-occupied loans	40		—	—	—	40	0.74
Commercial mortgage nonowner-occupied loans	2		—	—	—	2	0.03
Commercial construction loans	70		—	—	—	70	1.28
Total commercial portfolio loans	$	275	—	—	7	282	0.37	%


For the six months ended June 30, 2023 ($ in millions)	Term Extension		Interest Rate Reduction	Term Extension and Interest Rate Reduction	Payment Deferral	Total	% of Total Class
Commercial and industrial loans	$	183	1	—	7	191	0.34	%
Commercial mortgage owner-occupied loans	40		—	—	—	40	0.74
Commercial mortgage nonowner-occupied loans	24		—	2	—	26	0.44
Commercial construction loans	101		—	—	—	101	1.84
Total commercial portfolio loans	$	348	1	2	7	358	0.47	%

Residential mortgage portfolio segment

The Bancorp has established residential mortgage loan modification programs which define the type of modifications available as well as the eligibility criteria for borrowers. The designs of the Bancorp’s modification programs for residential mortgage loans are similar to those utilized by the various GSEs. The most common modification program utilized for residential mortgage loans is a term extension for up to 480 months from the modification date, combined with a change in interest rate to a fixed rate (which may be an increase or decrease from the rate in the original loan). As part of these modifications, the Bancorp may capitalize delinquent amounts due at the time of the modification into the principal balance of the loan when determining its modified payment structure. For loans where the modification results in a new monthly payment amount, borrowers are generally required to complete a trial period of three to four months before the loan is permanently modified. The Bancorp also offers payment delay modifications to qualified borrowers which allow either the deferral of repayment for delinquent amounts due until maturity or capitalization of delinquent amounts due into the principal balance of the loan. The number of monthly payments delayed varies by borrower but is most commonly within a range of 6 to 12 months.

The following tables present the amortized cost basis of the Bancorp’s residential mortgage loans that were modified for borrowers experiencing financial difficulty, by type of modification:


For the three months ended June 30, 2023 ($ in millions)	Total		% of Total Class

Payment delay	$	6	0.03	%
Term extension and payment delay	29		0.17

Term extension, interest rate reduction and payment delay	1		0.01
Total residential mortgage portfolio loans	$	36	0.21	%


For the six months ended June 30, 2023 ($ in millions)	Total		% of Total Class

Payment delay	$	14	0.08	%
Term extension and payment delay	42		0.24

Term extension, interest rate reduction and payment delay	3		0.02
Total residential mortgage portfolio loans	$	59	0.34	%

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The Bancorp had $17 million of in-process modifications to residential mortgage loans outstanding as of June 30, 2023 which are excluded from the completed modification activity in the tables above. These in-process modifications will be reported as completed modifications once the borrower satisfies the applicable contingencies in the modification agreement and the loan is contractually modified to make the modified terms permanent.

Consumer portfolio segment

The Bancorp’s modification programs for consumer loans vary based on type of loan. The most common modification program for home equity is a term extension for up to 360 months combined with a deferral of delinquent amounts due until maturity, which may also be combined with an interest rate reduction. Modification programs for credit card typically involve an interest rate reduction and an increase to the minimum monthly payment in order to repay a larger portion of outstanding balances. Modifications for indirect secured consumer loans and other consumer loans are less commonly utilized as part of the Bancorp’s loss mitigation activities and programs vary by specific product type.

The following tables present the amortized cost basis of the Bancorp’s consumer portfolio loans that were modified for borrowers experiencing financial difficulty, by portfolio class and type of modification:


For the three months ended June 30, 2023 ($ in millions)	Interest Rate Reduction		Payment Deferral	Term Extension and Payment Deferral	Term Extension, Interest Rate Reduction and Payment Deferral	Total	% of Total Class
Home equity	$	—	—	1	2	3	0.08	%
Credit card	8		—	—	—	8	0.44
Other consumer loans	—		2	—	—	2	0.03
Total consumer portfolio loans	$	8	2	1	2	13	0.05	%


For the six months ended June 30, 2023 ($ in millions)	Interest Rate Reduction		Payment Deferral	Term Extension and Payment Deferral	Term Extension, Interest Rate Reduction and Payment Deferral	Total	% of Total Class
Home equity	$	1	—	2	4	7	0.18	%
Credit card	17		—	—	—	17	0.94
Other consumer loans	—		3	—	—	3	0.05
Total consumer portfolio loans	$	18	3	2	4	27	0.10	%

Financial effects of loan modifications

The following tables present the financial effects of the Bancorp’s significant types of portfolio loan modifications to borrowers experiencing financial difficulty, by portfolio class:


For the three months ended June 30, 2023			Financial Effects
Commercial loans:
Commercial and industrial loans			Weighted-average length of term extensions was 4 months and the amount of payment delays represented approximately 12% of the related loan balances.
Commercial mortgage owner-occupied loans			Weighted-average length of term extensions was 10 months.
Commercial mortgage nonowner-occupied loans			Weighted-average length of term extensions was 6 months.
Commercial construction loans			Weighted-average length of term extensions was 12 months.
Residential mortgage loans			Weighted-average length of term extensions was 139 months and the amount of payment delays represented approximately 17% of the related loan balances.
Consumer loans:
Home equity			Weighted-average length of term extensions was 25.5 years, the weighted-average interest rate reduction was from 8.7% to 6.6% and the amount of payment deferrals represented approximately 3% of the related loan balances.

Credit card			Weighted-average interest rate reduction was from 23.6% to 3.6%.
Other consumer loans			Amount of payment deferrals represented approximately 5% of the related loan balances.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


For the six months ended June 30, 2023			Financial Effects
Commercial loans:
Commercial and industrial loans			Weighted-average length of term extensions was 4 months and the amount of payment delays represented approximately 12% of the related loan balances.
Commercial mortgage owner-occupied loans			Weighted-average length of term extensions was 10 months.
Commercial mortgage nonowner-occupied loans			Weighted-average length of term extensions was 8 months and the weighted-average interest rate reduction was from 9.1% to 8.9%.
Commercial construction loans			Weighted-average length of term extensions was 12 months.
Residential mortgage loans			Weighted-average length of term extensions was 136 months and the amount of payment delays represented approximately 16% of the related loan balances.
Consumer loans:
Home equity			Weighted-average length of term extensions was 25.1 years, the weighted-average interest rate reduction was from 8.3% to 6.5% and the amount of payment deferrals represented approximately 5% of the related loan balances.

Credit card			Weighted-average interest rate reduction was from 23.4% to 3.7%.
Other consumer loans			Amount of payment deferrals represented approximately 5% of the related loan balances.

Credit quality of modified loans

The Bancorp closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following tables present the Bancorp’s portfolio loans that were modified to borrowers experiencing financial difficulty, by age and portfolio class:


For the three months ended June 30, 2023 ($ in millions)			Past Due
	Current		30-89 Days	90 Days or More	Total
Commercial loans:
Commercial and industrial loans	$	170	—	—	170
Commercial mortgage owner-occupied loans	40		—	—	40
Commercial mortgage nonowner-occupied loans	2		—	—	2
Commercial construction loans	70		—	—	70
Residential mortgage loans	34		1	1	36
Consumer loans:
Home equity	3		—	—	3

Credit card(a)	5		2	1	8
Other consumer loans	2		—	—	2
Total portfolio loans	$	326	3	2	331

(a)Credit card loans continue to be reported as delinquent after modification as they are not returned to current status until the borrower demonstrates a willingness and ability to repay the loan according to its modified terms.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


For the six months ended June 30, 2023 ($ in millions)			Past Due
	Current		30-89 Days	90 Days or More	Total
Commercial loans:
Commercial and industrial loans	$	190	—	1	191
Commercial mortgage owner-occupied loans	40		—	—	40
Commercial mortgage nonowner-occupied loans	26		—	—	26
Commercial construction loans	101		—	—	101
Residential mortgage loans	56		2	1	59
Consumer loans:
Home equity	7		—	—	7

Credit card(a)	12		3	2	17
Other consumer loans	3		—	—	3
Total portfolio loans	$	435	5	4	444

The Bancorp considers modifications to borrowers experiencing financial difficulty that subsequently become 90 days or more past due under the modified terms as subsequently defaulted. There was an immaterial amount of modifications to borrowers experiencing financial difficulty that subsequently defaulted during the three and six months ended June 30, 2023 and were modified on or after January 1, 2023.

Troubled Debt Restructurings

Prior to the adoption of ASU 2022-02 on January 1, 2023, loans were accounted for as TDRs if the Bancorp, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. Refer to Note 1 and Note 6 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on the Bancorp’s accounting policies for the identification and measurement of TDRs and the related impact on the ALLL.

The Bancorp had commitments to lend additional funds to borrowers whose terms have been modified in a TDR, consisting of line of credit and letter of credit commitments of $130 million and $60 million, respectively, as of December 31, 2022.

The following table provides a summary of portfolio loans, by class, modified in a TDR by the Bancorp during the three months ended:


June 30, 2022 ($ in millions)	Number of Loans Modified in a TDR During the Period(a)	Amortized Cost Basis in Loans Modified in a TDR During the Period		Increase (Decrease) to ALLL Upon Modification	Charge-offs Recognized Upon Modification
Commercial loans:
Commercial and industrial loans	20	$	74	—	—
Commercial mortgage owner-occupied loans	1	—		—	—
Commercial mortgage nonowner-occupied loans	3	23		—	—
Commercial construction loans	2	4		(3)	—
Residential mortgage loans	478	73		4	—
Consumer loans:
Home equity	72	3		(1)	—
Indirect secured consumer loans	777	14		1	—
Credit card	1,193	6		3	—
Total portfolio loans	2,546	$	197	4	—

(a)Represents number of loans post-modification and excludes loans previously modified in a TDR.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table provides a summary of portfolio loans, by class, modified in a TDR by the Bancorp during the six months ended:


June 30, 2022 ($ in millions)(a)	Number of Loans Modified in a TDR During the Period(a)	Amortized Cost Basis in Loans Modified in a TDR During the Period		Increase (Decrease) to ALLL Upon Modification	Charge-offs Recognized Upon Modification
Commercial loans:
Commercial and industrial loans	50	$	165	13	—
Commercial mortgage owner-occupied loans	6	4		(1)	—
Commercial mortgage nonowner-occupied loans	3	23		—	—
Commercial construction loans	2	4		(3)	—
Residential mortgage loans	738	115		7	—
Consumer loans:
Home equity	124	10		(2)	—
Indirect secured consumer loans	2,051	41		1	—
Credit card	2,314	12		5	—
Total portfolio loans	5,288	$	374	20	—

(a)Represents number of loans post-modification and excludes loans previously modified in a TDR.

The Bancorp considered TDRs that became 90 days or more past due under the modified terms as subsequently defaulted. The following table provides a summary of TDRs that subsequently defaulted during the three months ended June 30, 2022 and were within 12 months of the restructuring date:


June 30, 2022 ($ in millions)(a)	Number of Contracts	Amortized Cost Basis
Commercial loans:
Commercial and industrial loans	1	$	—


Commercial construction loans	1	2
Residential mortgage loans	77	10
Consumer loans:
Home equity	8	—
Indirect secured consumer loans	34	1
Credit card	67	—
Total portfolio loans	188	$	13

(a)Excludes all loans held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.

The following table provides a summary of TDRs that subsequently defaulted during the six months ended June 30, 2022 and were within 12 months of the restructuring date:


June 30, 2022 ($ in millions)(a)	Number of Contracts	Amortized Cost Basis
Commercial loans:
Commercial and industrial loans	7	$	—


Commercial construction loans	1	2
Residential mortgage loans	106	13
Consumer loans:
Home equity	15	1
Indirect secured consumer loans	59	1
Credit card	172	1
Total portfolio loans	360	$	18

(a)Excludes all loans held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

7. Bank Premises and Equipment

The following table provides a summary of bank premises and equipment as of:


($ in millions)	June 30, 2023		December 31, 2022
Equipment	$	2,506	2,492
Buildings(a)	1,729		1,699
Land and improvements(a)	633		640
Leasehold improvements	608		568
Construction in progress(a)	140		124
Bank premises and equipment held for sale:
Land and improvements	16		17
Buildings	6		7

Accumulated depreciation and amortization	(3,363)		(3,360)
Total bank premises and equipment	$	2,275	2,187

(a)Buildings, land and improvements and construction in progress included $23 and $27 associated with parcels of undeveloped land intended for future branch expansion at June 30, 2023 and December 31, 2022, respectively.

The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service banking centers at certain locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion. The Bancorp closed a total of 24 banking centers throughout its footprint during the six months ended June 30, 2023.

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. Impairment losses associated with such assessments and lower of cost or market adjustments were immaterial and $1 million for the three months ended June 30, 2023 and 2022, respectively, and $1 million for both the six months ended June 30, 2023 and 2022. The recognized impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income.

8. Operating Lease Equipment

Operating lease equipment was $537 million and $627 million at June 30, 2023 and December 31, 2022, respectively, net of accumulated depreciation of $357 million and $338 million at June 30, 2023 and December 31, 2022, respectively. The Bancorp recorded lease income of $35 million and $36 million relating to lease payments for operating leases in leasing business revenue in the Condensed Consolidated Statements of Income during the three months ended June 30, 2023 and 2022, respectively, and $72 million during both the six months ended June 30, 2023 and 2022. Depreciation expense related to operating lease equipment was $29 million and $30 million during the three months ended June 30, 2023 and 2022, respectively, and $60 million and $59 million during the six months ended June 30, 2023 and 2022, respectively. The Bancorp received payments of $77 million and $72 million related to operating leases during the six months ended June 30, 2023 and 2022, respectively.

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. As a result of these recoverability assessments, the Bancorp recognized an immaterial amount of impairment losses during both the three months ended June 30, 2023 and 2022, and recognized an immaterial amount and $2 million of impairment losses during the six months ended June 30, 2023 and 2022, respectively, associated with operating lease assets. The recognized impairment losses were recorded in leasing business revenue in the Condensed Consolidated Statements of Income.

The following table presents future lease payments receivable from operating leases for the remainder of 2023 through 2028 and thereafter:


As of June 30, 2023 ($ in millions)	Undiscounted Cash Flows
Remainder of 2023	$	65
2024	103
2025	78
2026	50
2027	25
2028	10
Thereafter	15
Total operating lease payments	$	346

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

9. Lease Obligations – Lessee

The Bancorp leases certain banking centers, ATM sites, land for owned buildings and equipment. The Bancorp’s lease agreements typically do not contain any residual value guarantees or any material restrictive covenants. For more information on the accounting for lease obligations, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

The following table provides a summary of lease assets and lease liabilities as of:


($ in millions)	Condensed Consolidated Balance Sheets Caption	June 30, 2023		December 31, 2022
Assets
Operating lease right-of-use assets	Other assets	$	506	508
Finance lease right-of-use assets	Bank premises and equipment	140		150
Total right-of-use assets(a)		$	646	658
Liabilities
Operating lease liabilities	Accrued taxes, interest and expenses	$	597	599
Finance lease liabilities	Long-term debt	147		156
Total lease liabilities		$	744	755

(a) Operating and finance lease right-of-use assets are recorded net of accumulated amortization of $273 and $68, respectively, as of June 30, 2023, and $255 and $66, respectively, as of December 31, 2022.

The following table presents the components of lease costs:


($ in millions)	Condensed Consolidated Statements of Income Caption	For the three months ended June 30,			For the six months ended June 30,
		2023		2022	2023	2022
Lease costs:
Amortization of ROU assets	Net occupancy and equipment expense	$	5	5	10	9
Interest on lease liabilities	Interest on long-term debt	1		1	2	2
Total finance lease costs		$	6	6	12	11
Operating lease cost	Net occupancy expense	$	22	21	44	40
Short-term lease cost	Net occupancy expense	1		—	1	1
Variable lease cost	Net occupancy expense	7		7	14	14
Sublease income	Net occupancy expense	(1)		(1)	(1)	(1)
Total operating lease costs		$	29	27	58	54
Total lease costs		$	35	33	70	65

The Bancorp performs impairment assessments for ROU assets when events or changes in circumstances indicate that their carrying values may not be recoverable. In addition to the lease costs disclosed in the table above, the Bancorp recognized an immaterial amount and $1 million of impairment losses and termination charges for the ROU assets related to certain operating leases during the three months ended June 30, 2023 and 2022, respectively, and $1 million and $2 million during the six months ended June 30, 2023 and 2022, respectively. The recognized losses were recorded in net occupancy expense in the Condensed Consolidated Statements of Income.

The following table presents undiscounted cash flows for both operating leases and finance leases for the remainder of 2023 through 2028 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease liabilities:


As of June 30, 2023 ($ in millions)	Operating Leases		Finance Leases	Total
Remainder of 2023	$	45	10	55
2024	89		21	110
2025	81		14	95
2026	73		9	82
2027	65		8	73
2028	57		8	65
Thereafter	329		119	448
Total undiscounted cash flows	$	739	189	928
Less: Difference between undiscounted cash flows and discounted cash flows	142		42	184
Present value of lease liabilities	$	597	147	744

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents the weighted-average remaining lease term and weighted-average discount rate as of:


	June 30, 2023		December 31, 2022
Weighted-average remaining lease term (years):
Operating leases	10.90		10.80
Finance leases	15.28		15.31
Weighted-average discount rate:
Operating leases	3.54	%	3.35
Finance leases	3.02		2.94

The following table presents information related to lease transactions for the six months ended June 30:


($ in millions)	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:(a)
Operating cash flows from operating leases	$	46	44
Operating cash flows from finance leases	2		2
Financing cash flows from finance leases	8		10

Gains on sale-leaseback transactions	1		4

(a) The cash flows related to the short-term and variable lease payments are not included in the amounts in the table as they were not included in the measurement of lease liabilities.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

10. Intangible Assets

Intangible assets consist of core deposit intangibles, developed technology, customer relationships, and other intangible assets which include trade names, backlog, operating leases and non-compete agreements. Intangible assets are amortized on either a straight-line or an accelerated basis over their estimated useful lives and, based on the type of intangible asset, the amortization expense may be recorded in either leasing business revenue or other noninterest expense in the Condensed Consolidated Statements of Income.

The details of the Bancorp’s intangible assets are shown in the following table:


($ in millions)	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
As of June 30, 2023
Core deposit intangibles	$	209	(174)	35
Developed technology	106		(25)	81
Customer relationships	30		(8)	22
Other	17		(9)	8
Total intangible assets	$	362	(216)	146
As of December 31, 2022
Core deposit intangibles	$	229	(182)	47
Developed technology	106		(17)	89
Customer relationships	30		(7)	23
Other	20		(10)	10
Total intangible assets	$	385	(216)	169

As of June 30, 2023, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on intangible assets was $10 million and $11 million for the three months ended June 30, 2023 and 2022, respectively, and $23 million for both the six months ended June 30, 2023 and 2022. The Bancorp’s projections of amortization expense shown in the following table are based on existing asset balances as of June 30, 2023. Future amortization expense may vary from these projections.

Estimated amortization expense for the remainder of 2023 through 2027 is as follows:


($ in millions)	Total
Remainder of 2023	$	21
2024	35
2025	28
2026	22
2027	14

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

11. Variable Interest Entities

The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity at risk to finance their activities without additional subordinated financial support or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.

Consolidated VIEs

The Bancorp has consolidated VIEs related to an automobile loan securitization and a solar loan securitization where it has determined that it is the primary beneficiary. The following table provides a summary of assets and liabilities carried on the Condensed Consolidated Balance Sheets for the consolidated VIEs as of:


($ in millions)	June 30, 2023		December 31, 2022
Assets:
Other short-term investments	$	1	17
Indirect secured consumer loans	—		141
Other consumer loans	42		44
ALLL	(1)		(2)
Other assets	—		2
Total assets	$	42	202
Liabilities:
Other liabilities	$	9	9
Long-term debt	37		118
Total liabilities	$	46	127

As a result of a business acquisition in the second quarter of 2022, the Bancorp acquired interests in a previously completed securitization transaction in which solar loans were transferred to a bankruptcy remote trust which was deemed to be a VIE. Additionally, the Bancorp previously completed a securitization transaction in which the Bancorp transferred certain consumer automobile loans to a bankruptcy remote trust which was deemed to be a VIE. In the first quarter of 2023, the Bancorp exercised its cleanup call option on the outstanding automobile securitization. The Bancorp acquired all remaining automobile loans plus accrued interest, and those proceeds were used by the trust to repay the outstanding securitized debt. In each of these securitization transactions, the primary purposes of the VIEs were to issue asset-backed securities with varying levels of credit subordination and payment priority, as well as residual interests, and to provide access to liquidity for originated loans. The Bancorp retained residual interests in the VIEs and, therefore, has an obligation to absorb losses and a right to receive benefits from the VIEs that could potentially be significant to the VIEs. In addition, the Bancorp retained servicing rights for the underlying loans and, therefore, holds the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs. As a result, the Bancorp concluded that it is the primary beneficiary of the VIEs and has consolidated these VIEs. The assets of the VIEs are restricted to the settlement of the asset-backed securities and other obligations of the VIEs. The third-party holders of the asset-backed notes do not have recourse to the general assets of the Bancorp.

The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the VIEs are exposed include credit risk and prepayment risk. The credit and prepayment risks are managed through credit enhancements in the form of reserve accounts, overcollateralization, excess interest on the loans and the subordination of certain classes of asset-backed securities to other classes.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Non-consolidated VIEs

The following tables provide a summary of assets and liabilities carried on the Condensed Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds an interest, but is not the primary beneficiary of the VIE, as well as the Bancorp’s maximum exposure to losses associated with its interests in the entities as of:


June 30, 2023 ($ in millions)	Total Assets		Total Liabilities	Maximum Exposure
CDC investments	$	1,937	696	1,937
Private equity investments	200		—	374
Loans provided to VIEs	4,267		—	6,251
Lease pool entities	50		—	50
Solar loan securitizations	8		—	8


December 31, 2022 ($ in millions)	Total Assets		Total Liabilities	Maximum Exposure
CDC investments	$	1,856	653	1,856
Private equity investments	186		—	349
Loans provided to VIEs	4,374		—	6,438
Lease pool entities	61		—	61
Solar loan securitizations	10		—	10

CDC investments

CDC invests in projects to create affordable housing and revitalize business and residential areas. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited partnerships and LLCs and CDC typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the VIEs is driven by the performance of their underlying investment projects as well as the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the managing members who exercise full and exclusive control of the operations of the VIEs. For information regarding the Bancorp’s accounting for these investments, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

The Bancorp’s funding requirements are limited to its invested capital and any additional unfunded commitments for future equity contributions. The Bancorp’s maximum exposure to loss as a result of its involvement with the VIEs is limited to the carrying amounts of the investments, including the unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Condensed Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Condensed Consolidated Balance Sheets, are included in the previous tables for all periods presented. The Bancorp has no other liquidity arrangements or obligations to purchase assets of the VIEs that would expose the Bancorp to a loss. In certain arrangements, the general partner/managing member of the VIE has guaranteed a level of projected tax credits to be received by the limited partners/investor members, thereby minimizing a portion of the Bancorp’s risk.

At both June 30, 2023 and December 31, 2022, the Bancorp’s CDC investments included $1.6 billion of investments in affordable housing tax credits recognized in other assets in the Condensed Consolidated Balance Sheets. The unfunded commitments related to these investments were $688 million and $643 million at June 30, 2023 and December 31, 2022, respectively. The unfunded commitments as of June 30, 2023 are expected to be funded from 2023 to 2040.

The Bancorp has accounted for all of its qualifying LIHTC investments using the proportional amortization method of accounting. The following table summarizes the impact to the Condensed Consolidated Statements of Income related to these investments:


	Condensed Consolidated Statements of Income Caption(a)	For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2023		2022	2023	2022
Proportional amortization	Applicable income tax expense	$	57	42	100	77
Tax credits and other benefits	Applicable income tax expense	(66)		(50)	(117)	(91)

(a)The Bancorp did not recognize impairment losses resulting from the forfeiture or ineligibility of tax credits or other circumstances during both the three and six months ended June 30, 2023 and 2022.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Private equity investments

The Bancorp invests as a limited partner in private equity investments which provide the Bancorp an opportunity to obtain higher rates of return on invested capital, while also providing strategic opportunities in certain cases. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity investments. The funds finance primarily all of their activities from the partners’ capital contributions and investment returns. The Bancorp has determined that it is not the primary beneficiary of the funds because it does not have the obligation to absorb the funds’ expected losses or the right to receive the funds’ expected residual returns that could potentially be significant to the funds and lacks the power to direct the activities that most significantly impact the economic performance of the funds. The Bancorp, as a limited partner, does not have substantive participating or substantive kick-out rights over the general partner. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting.

The Bancorp is exposed to losses arising from the negative performance of the underlying investments in the private equity investments. As a limited partner, the Bancorp’s maximum exposure to loss is limited to the carrying amounts of the investments plus unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Condensed Consolidated Balance Sheets, are presented in previous tables. Also, at June 30, 2023 and December 31, 2022, the Bancorp’s unfunded commitment amounts to the private equity funds were $174 million and $163 million, respectively. As part of previous commitments, the Bancorp made capital contributions to private equity investments of $8 million and $12 million during the three months ended June 30, 2023 and 2022, respectively, and $20 million and $21 million during the six months ended June 30, 2023 and 2022, respectively.

Loans provided to VIEs

The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or a syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities that most significantly impact the economic performance of the entity and, therefore, is not the primary beneficiary.

The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorp’s maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorp’s outstanding loans to these VIEs are included in commercial loans in Note 5. As of June 30, 2023 and December 31, 2022, the Bancorp’s unfunded commitments to these entities were $2.0 billion and $2.1 billion, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorp’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.

Lease pool entities

The Bancorp is a co-investor with other unrelated leasing companies in three LLCs designed for the purpose of purchasing pools of residual interests in leases which have been originated or purchased by the other investing member. For each LLC, the leasing company is the managing member and has full authority over the day-to-day operations of the entity. While the Bancorp holds more than 50% of the equity interests in each LLC, the operating agreements require both members to consent to significant corporate actions, such as liquidating the entity or removing the manager. In addition, the Bancorp has a preference with regards to distributions such that all of the Bancorp’s equity contribution for each pool must be distributed, plus a pre-defined rate of return, before the other member may receive distributions. The leasing company is also entitled to the return of its investment plus a pre-defined rate of return before any residual profits are distributed to the members.

The lease pool entities are primarily subject to risk of losses on the lease residuals purchased. The Bancorp’s maximum exposure to loss is equal to the carrying amount of the investments. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it does not have the power to direct the activities that most significantly impact the economic performance of the entities. This power is held by the leasing company, who as managing member controls the servicing of the leases and collection of the proceeds on the residual interests.

Solar loan securitizations

As a result of a business acquisition in the second quarter of 2022, the Bancorp acquired interests in previously completed securitization transactions in which solar loans were transferred to bankruptcy remote trusts which were deemed to be VIEs. In each of these securitization transactions, the primary purposes of the VIEs were to issue asset-backed securities with varying levels of credit subordination and payment priority, as well as residual interests, and to provide access to liquidity for originated loans. The Bancorp retained certain risk retention interests in the classes of securities issued by the VIEs and retained servicing rights for the underlying loans. The Bancorp’s maximum exposure to loss is equal to the carrying amount of the investments. The Bancorp has determined that it is not the primary beneficiary of the VIEs because it does not have the obligation to absorb the VIEs expected losses or the right to receive the VIEs expected residual returns that could potentially be significant to the VIEs. The risk retention interests held by the Bancorp were included in available-for-sale debt and other securities in the Condensed Consolidated Balance Sheets.

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12. Sales of Receivables and Servicing Rights

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable-rate residential mortgage loans during the three and six months ended June 30, 2023 and 2022. In those sales, the Bancorp obtained servicing responsibilities and provided certain standard representations and warranties; however, the investors have no recourse to the Bancorp’s other assets for failure of debtors to pay when due. The Bancorp receives servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.

Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Residential mortgage loan sales(a)	$	1,233	3,103	2,508	6,502

Origination fees and gains on loan sales	22		23	41	49
Gross mortgage servicing fees	80		81	161	149

(a)Represents the unpaid principal balance at the time of the sale.

Servicing Rights

The Bancorp measures all of its mortgage servicing rights at fair value with changes in fair value reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

The following table presents changes in the servicing rights related to residential mortgage loans for the six months ended June 30:


($ in millions)	2023		2022
Balance, beginning of period	$	1,746	1,121
Servicing rights originated	35		101
Servicing rights purchased	23		191
Changes in fair value:
Due to changes in inputs or assumptions(a)	34		275
Other changes in fair value(b)	(74)		(106)
Balance, end of period	$	1,764	1,582

(a)Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.

(b)Primarily reflects changes due to realized cash flows and the passage of time.

The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy may include the purchase of free-standing derivatives and various available-for-sale debt and trading debt securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating OAS, earnings rates and prepayment speeds. The fair value of the servicing asset is based on the present value of expected future cash flows.

The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Securities losses, net – non-qualifying hedges on mortgage servicing rights	$	—	—	—	(1)
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a)	(56)		(103)	(35)	(284)
MSR fair value adjustment due to changes in inputs or assumptions(a)	53		84	34	275

(a)Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

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The key economic assumptions used in measuring the servicing rights related to residential mortgage loans that continued to be held by the Bancorp at the date of sale, securitization or purchase resulting from transactions completed during the three months ended June 30, 2023 and 2022 were as follows:


	June 30, 2023				June 30, 2022
	Weighted- Average Life (in years)	Prepayment Speed (annual)		OAS (bps)	Weighted- Average Life (in years)	Prepayment Speed (annual)		OAS (bps)
Fixed-rate	6.8	12.0	%	609	7.6	8.4	%	795
Adjustable-rate	—	—		—	2.9	27.3		789

At June 30, 2023 and December 31, 2022, the Bancorp serviced $102.8 billion and $103.2 billion, respectively, of residential mortgage loans for other investors. The value of MSRs that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. The weighted-average coupon of the MSR portfolio was 3.65% and 3.59% at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS for servicing rights related to residential mortgage loans are as follows:


($ in millions)(a)				Prepayment Speed Assumption						OAS Assumption
	Fair Value		Weighted- Average Life (in years)			Impact of Adverse Change on Fair Value				OAS (bps)	Impact of Adverse Change on Fair Value
				Rate		10%		20%	50%		10%		20%
Fixed-rate	$	1,759	9.0	5.2	%	$	(40)	(76)	(170)	628	$	(46)	(89)
Adjustable-rate	5		5.3	20.3		(1)		(1)	(2)	1,204	—		—

(a)The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on these variations in the assumptions typically cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The Bancorp believes that variations of these levels are reasonably possible; however, there is the potential that adverse changes in key assumptions could be even greater. Also, in the previous table, the effect of a variation in a particular assumption on the fair value of the interests that continue to be held by the Bancorp is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might magnify or counteract these sensitivities.

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13. Derivative Financial Instruments

The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions.

The Bancorp’s interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Bancorp’s net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed-upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.

Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBA securities and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBA securities are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made.

Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts.

The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp economically hedges significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable and independent counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorp’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures.

The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Condensed Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Condensed Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts with the exception of certain variation margin payments that are considered legal settlements of the derivative contracts. For derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlements, the variation margin payments are applied to net the fair value of the respective derivative contracts.

The Bancorp’s derivative assets include certain contractual features in which the Bancorp requires the counterparties to provide collateral, typically in the form of cash or securities, to offset changes in the fair value of the derivatives, including changes in the fair value due to credit risk of the counterparty. As of June 30, 2023 and December 31, 2022, the balance of collateral held by the Bancorp for derivative assets was $1.8 billion and $1.3 billion, respectively. For derivative contracts cleared through certain central clearing parties whose rules treat variation margin payments as settlements of the derivative contract, the payments for variation margin of $908 million and $1.0 billion as of June 30, 2023 and December 31, 2022, respectively, were applied to reduce the respective derivative contracts and were also not included in the total amount of collateral held. As of June 30, 2023 and December 31, 2022, the credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts was $6 million and $9 million, respectively.

In measuring the fair value of derivative liabilities, the Bancorp considers its own credit risk, taking into consideration collateral maintenance requirements of certain derivative counterparties and the duration of instruments with counterparties that do not require collateral maintenance. When necessary, the Bancorp posts collateral, primarily in the form of cash or securities, to offset changes in fair value of the derivatives, including changes in fair value due to the Bancorp’s credit risk. As of June 30, 2023 and December 31, 2022, the balance of collateral posted by the Bancorp for derivative liabilities was $857 million and $913 million, respectively. Additionally, as of June 30, 2023 and December 31, 2022, $1.4 billion and $1.0 billion, respectively, of variation margin payments were applied to the respective derivative contracts to reduce the Bancorp’s derivative liabilities and were also not included in the total amount of collateral posted. Certain of the Bancorp’s derivative liabilities contain credit risk-related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of both June 30, 2023 and December 31, 2022, the fair value of the additional collateral that could be required to be posted as a result of the credit risk-related contingent features being triggered was immaterial to the Bancorp’s Condensed Consolidated Financial Statements. The posting of collateral has been determined to remove the need for further consideration of

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credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp’s Condensed Consolidated Financial Statements.

The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.

The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of:


			Fair Value
June 30, 2023 ($ in millions)	Notional Amount(d)		Derivative Assets		Derivative Liabilities
Derivatives Designated as Qualifying Hedging Instruments:
Fair value hedges:
Interest rate swaps related to long-term debt	$	5,955	—		39

Total fair value hedges			—		39
Cash flow hedges:
Interest rate floors related to C&I loans	3,000		3		—
Interest rate swaps related to C&I loans	9,000		2		10
Interest rate swaps related to C&I loans - forward starting(a)	17,500		—		3
Interest rate swaps related to commercial mortgage and commercial construction loans	4,000		—		11
Interest rate swaps related to commercial mortgage and commercial construction loans - forward starting(a)	8,000		1		3
Total cash flow hedges			6		27
Total derivatives designated as qualifying hedging instruments			6		66
Derivatives Not Designated as Qualifying Hedging Instruments:
Free-standing derivatives – risk management and other business purposes:
Interest rate contracts related to MSR portfolio	4,350		49		12
Forward contracts related to residential mortgage loans held for sale(b)	1,002		5		—
Swap associated with the sale of Visa, Inc. Class B Shares	3,817		—		204
Foreign exchange contracts	178		—		3
Interest-only strips	45		1		—
Interest rate contracts for collateral management	30,000		10		11

Interest rate contracts for LIBOR transition	597		—		—
Total free-standing derivatives – risk management and other business purposes			65		230
Free-standing derivatives – customer accommodation:
Interest rate contracts(c)	114,891		1,272		1,675
Interest rate lock commitments	457		8		—
Commodity contracts	17,381		1,021		938
TBA securities	54		—		—
Foreign exchange contracts	29,323		561		515
Total free-standing derivatives – customer accommodation			2,862		3,128
Total derivatives not designated as qualifying hedging instruments			2,927		3,358
Total			$	2,933	3,424

(a)Forward starting swaps will become effective on various dates between July 2023 and February 2025.

(b)Includes forward sale and forward purchase contracts which are utilized to manage market risk on residential mortgage loans held for sale and the related interest rate lock commitments.

(c)Derivative assets and liabilities are presented net of variation margin of $564 and $172, respectively.

(d)Includes replacement contracts of approximately $12.5 billion for cash flow hedges, $18.0 billion for interest rate contracts for collateral management and $18.0 billion for interest rate contracts for customer accommodation which were the result of certain central clearing parties replacing existing LIBOR-based contracts with multiple separate contracts as part of the LIBOR transition.

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			Fair Value
December 31, 2022 ($ in millions)	Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives Designated as Qualifying Hedging Instruments:
Fair value hedges:
Interest rate swaps related to long-term debt	$	5,955	126		195

Total fair value hedges			126		195
Cash flow hedges:
Interest rate floors related to C&I loans	3,000		4		—
Interest rate swaps related to C&I loans	8,000		—		76
Interest rate swaps related to C&I loans - forward starting(a)	11,000		22		—
Interest rate swaps related to commercial mortgage and commercial construction loans	4,000		—		25
Interest rate swaps related to commercial mortgage and commercial construction loans - forward starting(a)	4,000		5		—
Total cash flow hedges			31		101
Total derivatives designated as qualifying hedging instruments			157		296
Derivatives Not Designated as Qualifying Hedging Instruments:
Free-standing derivatives – risk management and other business purposes:
Interest rate contracts related to MSR portfolio	2,975		62		17
Forward contracts related to residential mortgage loans held for sale(b)	1,869		9		7
Swap associated with the sale of Visa, Inc. Class B Shares	3,358		—		195
Foreign exchange contracts	156		1		—
Interest-only strips	58		4		—
Interest rate contracts for collateral management	12,000		9		1
Interest rate contracts for LIBOR transition	597		—		—
Total free-standing derivatives – risk management and other business purposes			85		220
Free-standing derivatives – customer accommodation:
Interest rate contracts(c)	83,605		998		1,663
Interest rate lock commitments	216		2		1
Commodity contracts	16,122		1,478		1,350
TBA securities	62		—		—
Foreign exchange contracts	25,322		453		422
Total free-standing derivatives – customer accommodation			2,931		3,436
Total derivatives not designated as qualifying hedging instruments			3,016		3,656
Total			$	3,173	3,952

(a)Forward starting swaps will become effective on various dates between February 2023 and February 2025.

(b)Includes forward sale and forward purchase contracts which are utilized to manage market risk on residential mortgage loans held for sale and the related interest rate lock commitments.

(c)Derivative assets and liabilities are presented net of variation margin of $694 and $37, respectively.

Fair Value Hedges

The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate or to hedge the exposure to changes in fair value of a recognized asset attributable to changes in the benchmark interest rate. Decisions to enter into these interest rate swaps are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. As of June 30, 2023, certain interest rate swaps met the criteria required to qualify for the shortcut method of accounting that permits the assumption of perfect offset. For all designated fair value hedges of interest rate risk as of June 30, 2023 that were not accounted for under the shortcut method of accounting, the Bancorp performed an assessment of hedge effectiveness using regression analysis with changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk recorded in the same income statement line in current period net income.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table reflects the changes in fair value of interest rate contracts, designated as fair value hedges and the changes in fair value of the related hedged items attributable to the risk being hedged, as well as the line items in the Condensed Consolidated Statements of Income in which the corresponding gains or losses are recorded:


	Condensed Consolidated Statements of Income Caption	For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2023		2022	2023	2022
Long-term debt:
Change in fair value of interest rate swaps hedging long-term debt	Interest on long-term debt	$	(131)	(111)	(39)	(263)
Change in fair value of hedged long-term debt attributable to the risk being hedged	Interest on long-term debt	131		111	42	263
Available-for-sale debt and other securities:
Change in fair value of interest rate swaps hedging available-for-sale debt and other securities	Interest on securities	—		—	—	8
Change in fair value of hedged available-for-sale debt and other securities attributable to the risk being hedged	Interest on securities	—		—	—	(8)

The following amounts were recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of:


($ in millions)	Condensed Consolidated Balance Sheets Caption	June 30, 2023		December 31, 2022
Long-term debt:
Carrying amount of the hedged items	Long-term debt	$	5,825	5,865
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items	Long-term debt	(106)		(64)
Available-for-sale debt and other securities:
Cumulative amount of fair value hedging adjustments remaining for hedged items for which hedge accounting has been discontinued	Available-for-sale debt and other securities	(12)		(14)

Cash Flow Hedges

The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The assets or liabilities may be grouped in circumstances where they share the same risk exposure that the Bancorp desires to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating-rate assets and liabilities. As of June 30, 2023, all hedges designated as cash flow hedges were assessed for effectiveness using regression analysis. The entire change in the fair value of the interest rate swap included in the assessment of hedge effectiveness is recorded in AOCI and reclassified from AOCI to current period earnings when the hedged item affects earnings. As of June 30, 2023, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 103 months.

Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest income in the Condensed Consolidated Statements of Income. As of June 30, 2023 and December 31, 2022, respectively, $522 million and $498 million of net deferred losses, net of tax, on cash flow hedges were recorded in AOCI in the Condensed Consolidated Balance Sheets. As of June 30, 2023, $277 million in net unrealized losses, net of tax, recorded in AOCI are expected to be reclassified into earnings during the next 12 months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations or the addition of other hedges subsequent to June 30, 2023.

During both the three and six months ended June 30, 2023 and 2022, there were no gains or losses reclassified from AOCI into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would no longer occur by the end of the originally specified time period or within the additional period of time as defined by U.S. GAAP.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table presents the pre-tax net (losses) gains recorded in the Condensed Consolidated Statements of Income and in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Amount of pre-tax net (losses) gains recognized in OCI	$	(454)	2	(177)	(405)
Amount of pre-tax net (losses) gains reclassified from OCI into net income	(81)		58	(146)	136

Free-Standing Derivative Instruments – Risk Management and Other Business Purposes

As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBA securities and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the spread between mortgage rates and LIBOR because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.

The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. These contracts generally settle within one year or less. IRLCs issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative instruments and the interest rate exposure on these commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income.

In conjunction with the sale of Visa, Inc. Class B Shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. This total return swap is accounted for as a free-standing derivative. Refer to Note 22 for further discussion of significant inputs and assumptions used in the valuation of this instrument.

The Bancorp entered into certain interest rate swap contracts for the purpose of managing its collateral positions across two central clearing parties. These interest rate swaps were perfectly offsetting positions that allowed the Bancorp to lower the cash posted as required initial margin at the clearing parties, which reduced its credit exposure to the clearing parties. Given that all relevant terms for these interest rate swaps are offsetting, these trades create no additional market risk for the Bancorp.

As part of the LIBOR to SOFR transition, the Bancorp received certain interest rate swap contracts from the two central clearing parties that are moving from an Effective Federal Funds Rate discounting curve to a SOFR discounting curve. The purpose of these interest rate swaps was to neutralize the impact on collateral requirements due to the change in discounting curves implemented by the central clearing parties.

The net (losses) gains recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:


	Condensed Consolidated Statements of Income Caption	For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2023		2022	2023	2022
Interest rate contracts:
Forward contracts related to residential mortgage loans held for sale	Mortgage banking net revenue	$	11	(31)	3	2
Interest rate contracts related to MSR portfolio	Mortgage banking net revenue	(56)		(103)	(35)	(284)
Interest-only strips	Other noninterest income	(3)		—	(3)	—
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes	Other noninterest income	(3)		5	(3)	3
Equity contracts:
Swap associated with sale of Visa, Inc. Class B Shares	Other noninterest income	(30)		(18)	(61)	(29)

Free-Standing Derivative Instruments – Customer Accommodation

The majority of the free-standing derivative instruments the Bancorp enters into are for the benefit of its commercial customers. These derivative contracts are not designated against specific assets or liabilities on the Condensed Consolidated Balance Sheets or to forecasted transactions and, therefore, do not qualify for hedge accounting. These instruments include foreign exchange derivative contracts entered into

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for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations, commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its interest rate exposure on commercial customer transactions by executing offsetting swap agreements with primary dealers. Revaluation gains and losses on interest rate, foreign exchange, commodity and other commercial customer derivative contracts are recorded as a component of commercial banking revenue or other noninterest income in the Condensed Consolidated Statements of Income.

The Bancorp enters into risk participation agreements, under which the Bancorp assumes credit exposure relating to certain underlying interest rate derivative contracts. The Bancorp only enters into these risk participation agreements in instances in which the Bancorp has participated in the loan that the underlying interest rate derivative contract was designed to hedge. The Bancorp will make payments under these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. The total notional amount of the risk participation agreements was $3.9 billion and $3.7 billion at June 30, 2023 and December 31, 2022, respectively, and the fair value was a liability of $8 million and $7 million at June 30, 2023 and December 31, 2022, respectively, which is included in other liabilities in the Condensed Consolidated Balance Sheets. As of June 30, 2023, the risk participation agreements had a weighted-average remaining life of 2.9 years.

The Bancorp’s maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio.

Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table as of:


($ in millions)	June 30, 2023		December 31, 2022
Pass	$	3,767	3,597
Special mention	48		81
Substandard	72		32
Total	$	3,887	3,710

The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:


	Condensed Consolidated Statements of Income Caption	For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2023		2022	2023	2022
Interest rate contracts:
Interest rate contracts for customers (contract revenue)	Commercial banking revenue	$	11	10	21	26

Interest rate contracts for customers (credit portion of fair value adjustment)	Other noninterest expense	2		3	(2)	9
Interest rate lock commitments	Mortgage banking net revenue	13		11	26	11
Commodity contracts:
Commodity contracts for customers (contract revenue)	Commercial banking revenue	11		9	21	18
Commodity contracts for customers (credit portion of fair value adjustment)	Other noninterest expense	—		(1)	(1)	(2)

Foreign exchange contracts:
Foreign exchange contracts for customers (contract revenue)	Commercial banking revenue	23		20	43	36
Foreign exchange contracts for customers (contract revenue)	Other noninterest income	(4)		8	(8)	10
Foreign exchange contracts for customers (credit portion of fair value adjustment)	Other noninterest expense	1		(2)	3	(2)

Offsetting Derivative Financial Instruments

The Bancorp’s derivative transactions are generally governed by ISDA Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties. When the Bancorp has more than one outstanding derivative

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transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment or booking office. The Bancorp’s policy is to present its derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis, even when provisions allowing for setoff are in place. However, for derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlements, the fair value of the respective derivative contracts is reported net of the variation margin payments.

Collateral amounts included in the tables below consist primarily of cash and highly rated government-backed securities and do not include variation margin payments for derivative contracts with legal rights of setoff for both periods shown.

The following table provides a summary of offsetting derivative financial instruments:


	Gross Amount Recognized in the Condensed Consolidated Balance Sheets(a)		Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
			Derivatives	Collateral(b)	Net Amount
As of June 30, 2023
Derivative assets	$	2,925	(964)	(1,235)	726
Derivative liabilities	3,424		(964)	(214)	2,246
As of December 31, 2022
Derivative assets	$	3,171	(1,405)	(887)	879
Derivative liabilities	3,951		(1,405)	(406)	2,140

(a)Amount does not include IRLCs because these instruments are not subject to master netting or similar arrangements.

(b)Amount of collateral received as an offset to asset positions or pledged as an offset to liability positions. Collateral values in excess of related derivative amounts recognized in the Condensed Consolidated Balance Sheets were excluded from this table.

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14. Other Short-Term Borrowings

Borrowings with original maturities of one year or less are classified as short-term. The following table presents a summary of the Bancorp’s other short-term borrowings as of:


($ in millions)	June 30, 2023		December 31, 2022
FHLB advances	$	5,300	4,300
Securities sold under repurchase agreements	363		388
Derivative collateral	114		124
Other borrowed money	40		26
Total other short-term borrowings	$	5,817	4,838

The Bancorp’s securities sold under repurchase agreements are accounted for as secured borrowings and are collateralized by securities included in available-for-sale debt and other securities in the Condensed Consolidated Balance Sheets. These securities are subject to changes in market value and, therefore, the Bancorp may increase or decrease the level of securities pledged as collateral based upon these movements in market value. As of both June 30, 2023 and December 31, 2022, all securities sold under repurchase agreements were secured by agency residential mortgage-backed securities and the repurchase agreements had an overnight remaining contractual maturity.

As of June 30, 2023, other borrowed money included $14 million of obligations recognized by the Bancorp under ASC Topic 860 related to certain loans sold to GNMA and serviced by the Bancorp. Under ASC Topic 860, once the Bancorp has the unilateral right to repurchase the GNMA loans due to the borrower missing three consecutive payments, the Bancorp is considered to have regained effective control over the loan. As such, the Bancorp is required to recognize both the loan and the repurchase liability, regardless of the intent to repurchase the loans.

15. Long-Term Debt

In June 2023, the Bancorp announced that the outstanding floating-rate capital securities issued by First Charter Capital Trust I and II that use three-month U.S. dollar LIBOR as the reference rate will transition to a replacement reference rate after June 30, 2023. The replacement reference rate is three-month CME Term SOFR plus a tenor spread adjustment of 0.26161%. Dividends and interest will begin accruing based on the replacement reference rate on September 15, 2023 with the first payment date of SOFR-based interest occurring on December 15, 2023. First Charter Capital Trust I and II hold junior subordinated floating-rate debentures that are the obligation of the Bancorp’s direct nonbank subsidiary holding company. Likewise, those junior subordinated floating-rate debentures will undergo the same transition as the floating rate capital securities issued by First Charter Capital Trust I and II. Refer to Note 3 for additional information regarding this transition.

For further information on a subsequent event related to long-term debt, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements.

16. Capital Actions

Changes in Terms of Preferred Stock Outstanding

In June 2023, the Bancorp announced that certain outstanding floating-rate or fixed-to-floating rate preferred stock represented by depositary shares (as well as the underlying preferred shares) issued by the Bancorp that use three-month U.S. dollar LIBOR as its reference rate will transition to a replacement reference rate after June 30, 2023. The replacement reference rate is three-month CME Term SOFR plus a tenor spread adjustment of 0.26161%. Refer to Note 3 for additional information regarding this transition.

The following table presents a summary of dividend and interest accrual and payment dates based on the replacement reference rate to be used after June 30, 2023:


Security Type	Date SOFR Rate Dividends/Interest Begins to Accrue(a)	First Payment Date of SOFR Rate Dividends/Interest
Depositary Shares Representing a 1/25th Ownership Interest in a Share of 5.10% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series H	September 30, 2023	December 31, 2023
Depositary Shares Representing a 1/1000th Ownership Interest in a Share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I	December 31, 2023	March 31, 2024
Depositary Shares Representing a 1/25th Ownership Interest in a Share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series J	September 30, 2023	December 31, 2023

(a)Using the SOFR rate in effect two business days prior.

Accelerated Share Repurchase Transaction

During the six months ended June 30, 2023, the Bancorp entered into and settled an accelerated share repurchase transaction. As part of the transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement was based generally on a

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discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreement. The accelerated share repurchase was treated as two separate transactions, (i) the repurchase of treasury shares on the repurchase date and (ii) a forward contract indexed to the Bancorp’s common stock.

The following table presents a summary of the Bancorp’s accelerated share repurchase transaction that was entered into and settled during the six months ended June 30, 2023:

Repurchase Date

Amount
($ in millions)

Shares Repurchased on Repurchase Date

Shares Received from Forward Contract Settlement

Total Shares Repurchased

Final Settlement Date

January 24, 2023

200

4,911,875

678,121

5,589,996

March 6, 2023

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17. Commitments, Contingent Liabilities and Guarantees

The Bancorp, in the normal course of business, enters into financial instruments and various agreements to meet the financing needs of its customers. The Bancorp also enters into certain transactions and agreements to manage its interest rate and prepayment risks, provide funding, equipment and locations for its operations and invest in its communities. These instruments and agreements involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Condensed Consolidated Balance Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on a case-by-case basis in accordance with the Bancorp’s credit policies. The Bancorp’s significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Condensed Consolidated Balance Sheets are discussed in the following sections.

Commitments

The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of:


($ in millions)	June 30, 2023		December 31, 2022
Commitments to extend credit	$	86,657	83,437
Letters of credit	2,130		2,009
Forward contracts related to residential mortgage loans held for sale	1,002		1,869
Capital commitments for private equity investments	174		163
Purchase obligations	91		113
Capital expenditures	95		94

Commitments to extend credit

Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. The Bancorp is exposed to credit risk in the event of nonperformance by the counterparty for the amount of the contract. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and the Bancorp’s exposure is limited to the replacement value of those commitments. As of June 30, 2023 and December 31, 2022, the Bancorp had a reserve for unfunded commitments, including letters of credit, totaling $207 million and $216 million, respectively, included in other liabilities in the Condensed Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same standard regulatory risk rating systems utilized for its loan and lease portfolio.

Risk ratings of outstanding commitments to extend credit under this risk rating system are summarized in the following table as of:


($ in millions)	June 30, 2023		December 31, 2022
Pass	$	84,600	81,345
Special mention	882		976
Substandard	1,175		1,116

Total commitments to extend credit	$	86,657	83,437

Letters of credit

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and expire as summarized in the following table as of June 30, 2023:


($ in millions)
Less than 1 year(a)	$	1,086
1 - 5 years(a)	1,041
Over 5 years	3
Total letters of credit	$	2,130

(a)Includes $2 and $4 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire in less than 1 year and between 1 - 5 years, respectively.

Standby letters of credit accounted for approximately 99% of total letters of credit at both June 30, 2023 and December 31, 2022 and are considered guarantees in accordance with U.S. GAAP. Approximately 68% and 67% of the total standby letters of credit were collateralized as of June 30, 2023 and December 31, 2022, respectively. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The reserve related to these standby letters of credit, which was included in the total reserve for unfunded commitments, was $22 million at both June 30, 2023 and December 31, 2022. The Bancorp monitors the credit risk associated with letters of credit using the same standard regulatory risk rating systems utilized for its loan and lease portfolio.

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Risk ratings of outstanding letters of credit under this risk rating system are summarized in the following table as of:


($ in millions)	June 30, 2023		December 31, 2022
Pass	$	1,922	1,827
Special mention	70		47
Substandard	138		135

Total letters of credit	$	2,130	2,009

At June 30, 2023 and December 31, 2022, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of June 30, 2023 and December 31, 2022, total VRDNs, of which FTS was the remarketing agent for all, were $464 million and $423 million, respectively. As remarketing agent, FTS is responsible for actively remarketing VRDNs to other investors when they have been tendered. If another investor is not identified, FTS may choose to purchase the VRDNs into inventory at its discretion while it continues to remarket them. If FTS purchases the VRDNs into inventory, it can subsequently tender back the VRDNs to the issuer’s trustee with proper advance notice. The Bancorp issued letters of credit, as a credit enhancement, to $97 million and $102 million of the VRDNs remarketed by FTS at June 30, 2023 and December 31, 2022, respectively. These letters of credit are included in the total letters of credit balance provided in the previous tables. The Bancorp held $2 million and $3 million of these VRDNs in its portfolio and classified them as trading debt securities at June 30, 2023 and December 31, 2022, respectively.

Forward contracts related to residential mortgage loans held for sale

The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table for all periods presented.

Other commitments

The Bancorp has entered into a limited number of agreements for work related to banking center construction and to purchase goods or services.

Contingent Liabilities

Legal claims

There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. Refer to Note 18 for additional information regarding these proceedings.

Guarantees

The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections.

Residential mortgage loans sold with representation and warranty provisions

Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan, or indemnify or make whole the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. For more information on how the Bancorp establishes the residential mortgage repurchase reserve, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

As of June 30, 2023 and December 31, 2022, the Bancorp maintained reserves related to loans sold with representation and warranty provisions totaling $8 million and $9 million, respectively, included in other liabilities in the Condensed Consolidated Balance Sheets.

The Bancorp uses the best information available when estimating its mortgage representation and warranty reserve; however, the estimation process is inherently uncertain and imprecise and, accordingly, losses in excess of the amounts reserved as of June 30, 2023 are reasonably possible. The Bancorp currently estimates that it is reasonably possible that it could incur losses related to mortgage representation and warranty provisions in an amount up to approximately $10 million in excess of amounts reserved. This estimate was derived by modifying the key assumptions to reflect management’s judgment regarding reasonably possible adverse changes to those assumptions. The actual repurchase losses could vary significantly from the recorded mortgage representation and warranty reserve or this estimate of reasonably possible losses, depending on the outcome of various factors, including those previously discussed.

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During both the three months ended June 30, 2023 and 2022, the Bancorp paid an immaterial amount in the form of make-whole payments and repurchased $14 million and $15 million, respectively, in outstanding principal of loans to satisfy investor demands. For both the six months ended June 30, 2023 and 2022, the Bancorp paid an immaterial amount in the form of make-whole payments and repurchased $32 million and $28 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during the three months ended June 30, 2023 and 2022 were $24 million and $21 million, respectively. Total repurchase demand requests during the six months ended June 30, 2023 and 2022 were $60 million and $44 million, respectively. Total outstanding repurchase demand inventory was $15 million and $25 million at June 30, 2023 and December 31, 2022, respectively.

Margin accounts

FTS, an indirect wholly-owned subsidiary of the Bancorp, guarantees the collection of all margin account balances held by its brokerage clearing agent for the benefit of its customers. FTS is responsible for payment to its brokerage clearing agent for any loss, liability, damage, cost or expense incurred as a result of customers failing to comply with margin or margin maintenance calls on all margin accounts. The margin account balances held by the brokerage clearing agent were $10 million and $14 million at June 30, 2023 and December 31, 2022, respectively. In the event of customer default, FTS has rights to the underlying collateral provided. Given the existence of the underlying collateral provided and negligible historical credit losses, the Bancorp does not maintain a loss reserve related to the margin accounts.

Long-term borrowing obligations

The Bancorp had certain fully and unconditionally guaranteed long-term borrowing obligations issued by wholly-owned issuing trust entities of $62 million at both June 30, 2023 and December 31, 2022.

Visa litigation

The Bancorp, as a member bank of Visa prior to Visa’s reorganization and IPO (the “IPO”) of its Class A common shares (the “Class A Shares”) in 2008, had certain indemnification obligations pursuant to Visa’s certificate of incorporation and bylaws and in accordance with its membership agreements. In accordance with Visa’s bylaws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorp’s proportional share of losses based on the pre-IPO membership interests. As part of its reorganization and IPO, the Bancorp’s indemnification obligation was modified to include only certain known or anticipated litigation (the “Covered Litigation”) as of the date of the restructuring. This modification triggered a requirement for the Bancorp to recognize a liability equal to the fair value of the indemnification liability.

In conjunction with the IPO, the Bancorp received 10.1 million of Visa’s Class B common shares (the “Class B Shares”) based on the Bancorp’s membership percentage in Visa prior to the IPO. The Class B Shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing or the date on which the Covered Litigation has been resolved; therefore, the Bancorp’s Class B Shares were classified in other assets and accounted for at their carryover basis of $0. Visa deposited $3 billion of the proceeds from the IPO into a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Covered Litigation. Since then, when Visa’s litigation committee determined that the escrow account was insufficient, Visa issued additional Class A Shares and deposited the proceeds from the sale of the Class A Shares into the litigation escrow account. When Visa funded the litigation escrow account, the Class B Shares were subjected to dilution through an adjustment in the conversion rate of Class B Shares into Class A Shares.

In 2009, the Bancorp completed the sale of Visa, Inc. Class B Shares and entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B Shares into Class A Shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which the Covered Litigation is settled. Refer to Note 22 for additional information on the valuation of the swap. The counterparty to the swap as a result of its ownership of the Class B Shares will be impacted by dilutive adjustments to the conversion rate of the Class B Shares into Class A Shares caused by any Covered Litigation losses in excess of the litigation escrow account. If actual judgments in, or settlements of, the Covered Litigation significantly exceed current expectations, then additional funding by Visa of the litigation escrow account and the resulting dilution of the Class B Shares could result in a scenario where the Bancorp’s ultimate exposure associated with the Covered Litigation (the “Visa Litigation Exposure”) exceeds the value of the Class B Shares owned by the swap counterparty (the “Class B Value”). In the event the Bancorp concludes that it is probable that the Visa Litigation Exposure exceeds the Class B Value, the Bancorp would record a litigation reserve liability and a corresponding amount of other noninterest expense for the amount of the excess. Any such litigation reserve liability would be separate and distinct from the fair value derivative liability associated with the total return swap.

As of the date of the Bancorp’s sale of the Visa Class B Shares and through June 30, 2023, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B value. Based on this determination, upon the sale of Class B Shares, the Bancorp reversed its net Visa litigation reserve liability and recognized a free-standing derivative liability associated with the total return swap. The fair value of the swap liability was $204 million at June 30, 2023 and $195 million at December 31, 2022. Refer to Note 13 and Note 22 for further information.

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After the Bancorp’s sale of the Class B Shares, Visa has funded additional amounts into the litigation escrow account which have resulted in further dilutive adjustments to the conversion of Class B Shares into Class A Shares, and along with other terms of the total return swap, required the Bancorp to make cash payments in varying amounts to the swap counterparty as follows:


Period ($ in millions)	Visa Funding Amount		Bancorp Cash Payment Amount
Q2 2010	$	500	20
Q4 2010	800		35
Q2 2011	400		19
Q1 2012	1,565		75
Q3 2012	150		6
Q3 2014	450		18
Q2 2018	600		26
Q3 2019	300		12
Q4 2021	250		11
Q2 2022	600		25
Q4 2022	350		15
Q2 2023	500		(a)

(a)The Bancorp made a cash payment of $21 million to the swap counterparty on July 10, 2023 as a result of the Visa escrow funding in the second quarter of 2023.

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18. Legal and Regulatory Proceedings

Litigation

Visa/MasterCard Merchant Interchange Litigation

In April 2006, the Bancorp was added as a defendant in a consolidated antitrust class action lawsuit originally filed against Visa®, MasterCard® and several other major financial institutions in the United States District Court for the Eastern District of New York (In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case No. 5-MD-1720). The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claimed that the interchange fees charged by card-issuing banks were unreasonable and sought injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp is currently also subject to a possible indemnification obligation of Visa as discussed in Note 17 and has also entered into judgment and loss sharing agreements with Visa, MasterCard and certain other named defendants. In October 2012, the parties to the litigation entered into a settlement agreement that was initially approved by the trial court but reversed by the U.S. Second Circuit Court of Appeals and remanded to the district court for further proceedings. More than 500 of the merchants who requested exclusion from the class filed separate federal lawsuits against Visa, MasterCard and certain other defendants alleging similar antitrust violations. These individual federal lawsuits were transferred to the United States District Court for the Eastern District of New York. While the Bancorp is only named as a defendant in one of the individual federal lawsuits, it may have obligations pursuant to indemnification arrangements and/or the judgment or loss sharing agreements noted above. On September 17, 2018, the defendants in the consolidated class action signed a second settlement agreement (the “Amended Settlement Agreement”) resolving the claims seeking monetary damages by the proposed plaintiffs’ class (the “Plaintiff Damages Class”) and superseding the original settlement agreement entered into in October 2012. The Amended Settlement Agreement included, among other terms, a release from participating class members for liability for claims that accrue no later than five years after the Amended Settlement Agreement becomes final. The Amended Settlement Agreement provided for a total payment by all defendants of approximately $6.24 billion, composed of approximately $5.34 billion held in escrow plus an additional $900 million in new funds. Pursuant to the terms of the Settlement Agreement, $700 million of the additional $900 million has been returned to the defendants due to the level of opt-outs from the class. The Bancorp’s allocated share of the settlement is within existing reserves, including funds maintained in escrow. On December 13, 2019, the Court entered an order granting final approval for the settlement, and on March 15, 2023, the Second Circuit affirmed that order. The settlement does not resolve the claims of the separate proposed plaintiffs’ class seeking injunctive relief or the claims of merchants who have opted out of the proposed class settlement and are pursuing, or may in the future decide to pursue, private lawsuits. On September 27, 2021, the Court entered an order certifying a class of merchants pursuing claims for injunctive relief. The ultimate outcome in this matter, including the timing of resolution, remains uncertain. Refer to Note 17 for further information.

Klopfenstein v. Fifth Third Bank

On August 3, 2012, William Klopfenstein and Adam McKinney filed a lawsuit against Fifth Third Bank in the United States District Court for the Northern District of Ohio (Klopfenstein et al. v. Fifth Third Bank), alleging that the 120% APR that Fifth Third disclosed on its Early Access program was misleading. Early Access is a deposit-advance program offered to eligible customers with checking accounts. The plaintiffs sought to represent a nationwide class of customers who used the Early Access program and repaid their cash advances within 30 days. On October 31, 2012, the case was transferred to the United States District Court for the Southern District of Ohio. In 2013, four similar putative class action lawsuits were filed against Fifth Third Bank in federal courts throughout the country (Lori and Danielle Laskaris v. Fifth Third Bank, Janet Fyock v. Fifth Third Bank, Jesse McQuillen v. Fifth Third Bank, and Brian Harrison v. Fifth Third Bank). Those four lawsuits were transferred to the Southern District of Ohio and consolidated with the original lawsuit as In re: Fifth Third Early Access Cash Advance Litigation (Case No. 1:12-CV-851). On behalf of a putative class, the plaintiffs sought unspecified monetary and statutory damages, injunctive relief, punitive damages, attorneys’ fees, and pre- and post-judgment interest. On March 30, 2015, the court dismissed all claims alleged in the consolidated lawsuit except a claim under the TILA. On May 28, 2019, the Sixth Circuit Court of Appeals reversed the dismissal of plaintiffs’ breach of contract claim and remanded for further proceedings. The plaintiffs’ claimed damages for the alleged breach of contract claim exceed $440 million, plus prejudgment interest. On March 26, 2021, the trial court granted plaintiffs’ motion for class certification. On March 29, 2023, the trial court issued an order granting summary judgement on plaintiffs’ TILA claim, with statutory damages capped at $2 million plus costs and attorney fees. Plaintiffs’ claim for breach of contract proceeded to trial beginning on April 17, 2023. On April 27, 2023, the jury returned a verdict in favor of the Bank, finding a breach of contract, but that the voluntary payment doctrine is a complete defense to the breach of contract claim. Both parties have filed post-trial motions related to the jury verdict, which are currently pending before the trial court.

Bureau of Consumer Financial Protection v. Fifth Third Bank, National Association

On March 9, 2020, the CFPB filed a lawsuit against Fifth Third in the United States District Court for the Northern District of Illinois entitled CFPB v. Fifth Third Bank, National Association, Case No. 1:20-CV-1683 (N.D. Ill.) (ABW), alleging violations of the Consumer Financial Protection Act, TILA, and Truth in Savings Act related to Fifth Third’s alleged opening of unspecified numbers of allegedly unauthorized credit card, savings, checking, online banking and early access accounts from 2010 through 2016. The CFPB seeks unspecified amounts of civil monetary penalties as well as unspecified customer remediation. On February 12, 2021, the court granted Fifth Third’s motion to transfer venue to the United States District Court for the Southern District of Ohio. The case is currently in discovery and no trial date has been set.

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Shareholder Litigation

On July 31, 2020, a putative shareholder class action lawsuit captioned Dr. Steven Fox, individually and on behalf of all others similarly situated v. Fifth Third Bancorp, et al., Case No. 2020CH05219 was filed on behalf of former shareholders of MB Financial, Inc. in the Cook County, Illinois Circuit Court. The suit brings claims for violation of Sections 11 and 12(a)(2) of the Securities Act of 1933, alleging that the Bancorp and certain of its officers and directors made material misstatements and omissions regarding an alleged improper cross-selling strategy in filings made in connection with the Bancorp’s merger with MB Financial, Inc. On March 19, 2021, the trial court denied the defendants’ motion to dismiss. On May 17, 2023, the court preliminarily approved the parties’ class settlement in the amount of $5.5 million. A final approval hearing is scheduled for September 14, 2023.

In addition, shareholder derivative lawsuits have been filed seeking monetary damages on behalf of the Bancorp alleging certain claims against various officers and directors relating to an alleged improper cross-selling strategy. Five lawsuits were consolidated into a single action pending in the U.S. District Court for the Northern District of Illinois captioned In re Fifth Third Bancorp Derivative Litigation, Case No. 1:20-cv-04115. On March 8, 2023, the district court granted the defendants’ motion to dismiss the amended complaint with prejudice. There was no appeal, so the case is terminated. Also separately filed in the Hamilton County, Ohio Court of Common Pleas is Sandys v. Carmichael, et al., Case No. A2004539 (filed December 28, 2020) and The City of Miami Firefighters’ and Police Officers’ Retirement Trust v. Carmichael, et al., Case No. A2200330 (filed January 27, 2022). On April 18, 2022, the Sandys shareholder voluntarily dismissed the lawsuit without prejudice. The case brought by The City of Miami Firefighters’ and Police Officers’ Retirement Trust is pending.

The Bancorp has also received several shareholder demands under Ohio Rev. Code § 1701.37(c) and lawsuits have been filed arising out of the same. Finally, the Bancorp has received shareholder demands that the Bancorp’s Board of Directors investigate and commence a civil action for failure to detect and/or prevent the alleged illegal cross-selling strategy.

Howards v. Fifth Third Bank

On March 8, 2018, Plaintiff Troy Howards filed a putative class action against Fifth Third Bank in the United States District Court for the Central District of California (Case No. 1:18-CV-869, S.D. OH 2018), alleging that Fifth Third improperly charged certain fees related to insufficient funds, customer overdrafts, and out-of-network ATM use. Venue was subsequently transferred to the United States District Court for the Southern District of Ohio. Plaintiff filed claims for breach of contract, breach of the implied covenant of good faith and fair dealing, for violation of the California Unfair Competition Law (Ca. Bus. & Prof. Code sec. 17200, et seq)., and the California Consumer Legal Remedies Act (Cal. Civ. Code sec. 1750 et seq.). Plaintiff seeks to represent putative nationwide classes and California classes of consumers allegedly charged improper repeated insufficient funds fees, improper overdraft fees, and fees for out-of-network ATM use from the beginning of the applicable statute of limitations to present. Plaintiff seeks damages of restitution and disgorgement in the amount of the allegedly unlawfully charged fees, damages proved at trial together with interest as allowed by applicable law. Fifth Third filed a motion to dismiss all claims. On February 6, 2023, the trial court issued an order dismissing the Plaintiff’s breach of contract claim with respect to out-of-network ATM fees and dismissing the two claims for violations of California consumer protection statutes. The Court denied Fifth Third’s motion to dismiss as it relates to the claims for breach of contract and breach of the implied covenant of good faith and fair dealing for certain customer overdrafts and insufficient funds fees. The case is in discovery, and no trial date has been set.

Other litigation

The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes that the resulting liability, if any, from these other actions would not have a material effect upon the Bancorp’s consolidated financial position, results of operations or cash flows.

Governmental Investigations and Proceedings

The Bancorp and/or its affiliates are or may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by various governmental regulatory agencies and law enforcement authorities, including but not limited to the FRB, OCC, CFPB, SEC, FINRA, U.S. Department of Justice, etc., as well as state and other governmental authorities and self-regulatory bodies regarding their respective businesses. For example, the Bancorp’s broker-dealer and investment advisory subsidiaries are cooperating with an investigation by the SEC regarding compliance with certain record-keeping requirements for business-related electronic communications on unapproved channels and are currently engaged in settlement negotiations, the results of which the Bancorp anticipates will not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements. The Commodity Futures Trading Commission (“CFTC”) is conducting a similar investigation into the Bancorp’s provisionally registered swap dealer. The SEC and CFTC are also conducting similar investigations of record-keeping practices at other financial institutions. Additional matters will likely arise from time to time. Any of these matters may result in material adverse consequences or reputational harm to the Bancorp, its affiliates and/or their respective directors, officers and other personnel, including adverse judgments, findings, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorp’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcement. Additionally, in some cases, regulatory authorities may take supervisory actions that are considered to be confidential supervisory information which may not be publicly disclosed.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Reasonably Possible Losses in Excess of Accruals

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. The following factors, among others, contribute to this lack of predictability: claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. 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. Any such accrual is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts accrued. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal and regulatory proceedings in an aggregate amount up to approximately $78 million in excess of amounts accrued, with it also being reasonably possible that no losses will be incurred in these matters. The estimates included in this amount are based on the Bancorp’s analysis of currently available information, and as new information is obtained the Bancorp may change its estimates.

For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established accrual that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established accruals, the Bancorp believes that the eventual outcome of the actions against the Bancorp and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on the Bancorp’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to the Bancorp’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

19. Income Taxes

The applicable income tax expense was $174 million and $162 million for the three months ended June 30, 2023 and 2022, respectively, and $334 million and $279 million for the six months ended June 30, 2023 and 2022 respectively. The effective tax rates for the three months ended June 30, 2023 and 2022 were 22.5% and 22.4%, respectively, and 22.4% and 20.9% for the six months ended June 30, 2023 and 2022, respectively.

While it is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the Bancorp’s uncertain tax positions could increase or decrease during the next twelve months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next twelve months.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

20. Accumulated Other Comprehensive Income

The tables below present the activity of the components of OCI and AOCI for the three months ended:


	Total OCI				Total AOCI
June 30, 2023 ($ in millions)	Pre-tax Activity		Tax Effect	Net Activity	Beginning Balance	Net Activity	Ending Balance
Unrealized holding losses on available-for-sale debt securities arising during period	$	(831)	198	(633)
Reclassification adjustment for net gains on available-for-sale debt securities included in net income	—		—	—
Net unrealized losses on available-for-sale debt securities	(831)		198	(633)	(3,989)	(633)	(4,622)

Unrealized holding losses on cash flow hedge derivatives arising during period	(454)		102	(352)
Reclassification adjustment for net losses on cash flow hedge derivatives included in net income	81		(18)	63
Net unrealized losses on cash flow hedge derivatives	(373)		84	(289)	(233)	(289)	(522)

Net actuarial loss arising during the year	—		—	—
Reclassification of amounts to net periodic benefit costs	1		—	1
Defined benefit pension plans, net	1		—	1	(19)	1	(18)

Other	—		—	—	(4)	—	(4)
Total	$	(1,203)	282	(921)	(4,245)	(921)	(5,166)


	Total OCI				Total AOCI
June 30, 2022 ($ in millions)	Pre-tax Activity		Tax Effect	Net Activity	Beginning Balance	Net Activity	Ending Balance
Unrealized holding losses on available-for-sale debt securities arising during period	$	(1,964)	458	(1,506)
Reclassification adjustment for net gains on available-for-sale debt securities included in net income	—		—	—
Net unrealized losses on available-for-sale debt securities	(1,964)		458	(1,506)	(1,040)	(1,506)	(2,546)

Unrealized holding gains on cash flow hedge derivatives arising during period	2		—	2
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income	(58)		13	(45)
Net unrealized losses on cash flow hedge derivatives	(56)		13	(43)	(20)	(43)	(63)

Net actuarial loss arising during the year	(1)		—	(1)
Reclassification of amounts to net periodic benefit costs	2		—	2
Defined benefit pension plans, net	1		—	1	(32)	1	(31)

Other	—		—	—	(4)	—	(4)
Total	$	(2,019)	471	(1,548)	(1,096)	(1,548)	(2,644)

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The tables below present the activity of the components of OCI and AOCI for the six months ended:


	Total OCI				Total AOCI
June 30, 2023 ($ in millions)	Pre-tax Activity		Tax Effect	Net Activity	Beginning Balance	Net Activity	Ending Balance
Unrealized holding losses on available-for-sale debt securities arising during period	$	(43)	10	(33)
Reclassification adjustment for net gains on available-for-sale debt securities included in net income	—		—	—
Net unrealized losses on available-for-sale debt securities	(43)		10	(33)	(4,589)	(33)	(4,622)

Unrealized holding losses on cash flow hedge derivatives arising during period	(177)		40	(137)
Reclassification adjustment for net losses on cash flow hedge derivatives included in net income	146		(33)	113
Net unrealized losses on cash flow hedge derivatives	(31)		7	(24)	(498)	(24)	(522)

Net actuarial loss arising during the year	—		—	—
Reclassification of amounts to net periodic benefit costs	1		—	1
Defined benefit pension plans, net	1		—	1	(19)	1	(18)

Other	—		—	—	(4)	—	(4)
Total	$	(73)	17	(56)	(5,110)	(56)	(5,166)


	Total OCI				Total AOCI
June 30, 2022 ($ in millions)	Pre-tax Activity		Tax Effect	Net Activity	Beginning Balance	Net Activity	Ending Balance
Unrealized holding losses on available-for-sale debt securities arising during period	$	(4,469)	1,034	(3,435)
Reclassification adjustment for net gains on available-for-sale debt securities included in net income	(3)		1	(2)
Net unrealized losses on available-for-sale debt securities	(4,472)		1,035	(3,437)	891	(3,437)	(2,546)

Unrealized holding losses on cash flow hedge derivatives arising during period	(405)		95	(310)
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income	(136)		30	(106)
Net unrealized losses on cash flow hedge derivatives	(541)		125	(416)	353	(416)	(63)

Net actuarial loss arising during the year	(1)		—	(1)
Reclassification of amounts to net periodic benefit costs	3		—	3
Defined benefit pension plans, net	2		—	2	(33)	2	(31)

Other	—		—	—	(4)	—	(4)
Total	$	(5,011)	1,160	(3,851)	1,207	(3,851)	(2,644)

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The table below presents reclassifications out of AOCI:


	Condensed Consolidated Statements of Income Caption	For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2023		2022	2023	2022
Net unrealized losses on available-for-sale debt securities:(a)
Net gains included in net income	Securities gains (losses), net	$	—	—	—	3
	Income before income taxes	—		—	—	3
	Applicable income tax expense	—		—	—	(1)
	Net income	—		—	—	2
Net unrealized losses on cash flow hedge derivatives:(a)
Interest rate contracts related to C&I, commercial mortgage and commercial construction loans	Interest and fees on loans and leases	(81)		58	(146)	136
	Income before income taxes	(81)		58	(146)	136
	Applicable income tax expense	18		(13)	33	(30)
	Net income	(63)		45	(113)	106
Net periodic benefit costs:(a)
Amortization of net actuarial loss	Compensation and benefits(b)	(1)		(1)	(1)	(2)
Settlements	Compensation and benefits(b)	—		(1)	—	(1)
	Income before income taxes	(1)		(2)	(1)	(3)
	Applicable income tax expense	—		—	—	—
	Net income	(1)		(2)	(1)	(3)

Total reclassifications for the period	Net income	$	(64)	43	(114)	105

(a)Amounts in parentheses indicate reductions to net income.

(b)This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 22 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for further information.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

21. Earnings Per Share

The following tables provide the calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share:


	2023					2022
For the three months ended June 30, (in millions, except per share data)	Income		Average Shares	Per Share Amount		Income		Average Shares	Per Share Amount
Earnings Per Share:
Net income available to common shareholders	$	562				$	526
Less: Income allocated to participating securities	—					1
Net income allocated to common shareholders	$	562	684	$	0.82	$	525	689	$	0.76
Earnings Per Diluted Share:
Net income available to common shareholders	$	562				$	526
Effect of dilutive securities:
Stock-based awards	—		2			—		6
Net income available to common shareholders plus assumed conversions	$	562				$	526
Less: Income allocated to participating securities	—					1
Net income allocated to common shareholders plus assumed conversions	$	562	686	$	0.82	$	525	695	$	0.76


	2023					2022
For the six months ended June 30, (in millions, except per share data)	Income		Average Shares	Per Share Amount		Income		Average Shares	Per Share Amount
Earnings Per Share:
Net income available to common shareholders	$	1,097				$	1,000
Less: Income allocated to participating securities	—					1
Net income allocated to common shareholders	$	1,097	684	$	1.60	$	999	688	$	1.45
Earnings Per Diluted Share:
Net income available to common shareholders	$	1,097				$	1,000
Effect of dilutive securities:
Stock-based awards	—		4			—		8
Net income available to common shareholders plus assumed conversions	$	1,097				$	1,000
Less: Income allocated to participating securities	—					1
Net income allocated to common shareholders plus assumed conversions	$	1,097	688	$	1.59	$	999	696	$	1.44

Shares are excluded from the computation of earnings per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for the three and six months ended June 30, 2023 excludes 9 million and 6 million shares, respectively, of stock-based awards because their inclusion would have been anti-dilutive. The diluted earnings per share computation for the three and six months ended June 30, 2022 excludes 3 million and 2 million shares, respectively, of stock-based awards because their inclusion would have been anti-dilutive.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

22. Fair Value Measurements

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. For more information regarding the fair value hierarchy, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize assets and liabilities measured at fair value on a recurring basis as of:


	Fair Value Measurements Using
June 30, 2023 ($ in millions)	Level 1		Level 2	Level 3	Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agencies securities	$	2,740	—	—	2,740
Obligations of states and political subdivisions securities	—		2	—	2
Mortgage-backed securities:
Agency residential mortgage-backed securities	—		10,581	—	10,581
Agency commercial mortgage-backed securities	—		25,547	—	25,547
Non-agency commercial mortgage-backed securities	—		4,489	—	4,489
Asset-backed securities and other debt securities	—		5,134	—	5,134
Available-for-sale debt and other securities(a)	2,740		45,753	—	48,493
Trading debt securities:
U.S. Treasury and federal agencies securities	628		23	—	651
Obligations of states and political subdivisions securities	—		69	—	69
Agency residential mortgage-backed securities	—		9	—	9
Asset-backed securities and other debt securities	—		410	—	410
Trading debt securities	628		511	—	1,139
Equity securities	319		12	—	331
Residential mortgage loans held for sale	—		596	—	596
Residential mortgage loans(b)	—		—	124	124
Servicing rights	—		—	1,764	1,764
Derivative assets:
Interest rate contracts	8		1,333	10	1,351
Foreign exchange contracts	—		561	—	561
Commodity contracts	134		887	—	1,021
Derivative assets(c)	142		2,781	10	2,933
Total assets	$	3,829	49,653	1,898	55,380
Liabilities:
Derivative liabilities:
Interest rate contracts	$	—	1,756	8	1,764
Foreign exchange contracts	—		518	—	518
Equity contracts	—		—	204	204
Commodity contracts	34		904	—	938
Derivative liabilities(d)	34		3,178	212	3,424
Short positions:
U.S. Treasury and federal agencies securities	83		—	—	83
Asset-backed securities and other debt securities	—		110	—	110
Short positions(d)	83		110	—	193
Total liabilities	$	117	3,288	212	3,617

(a)Excludes FHLB, FRB and DTCC restricted stock holdings totaling $339, $493 and $4, respectively, at June 30, 2023.

(b)Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.

(c)Included in other assets in the Condensed Consolidated Balance Sheets.

(d)Included in other liabilities in the Condensed Consolidated Balance Sheets.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


	Fair Value Measurements Using
December 31, 2022 ($ in millions)	Level 1		Level 2	Level 3	Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agencies securities	$	2,495	—	—	2,495
Obligations of states and political subdivisions securities	—		18	—	18
Mortgage-backed securities:
Agency residential mortgage-backed securities	—		11,237	—	11,237
Agency commercial mortgage-backed securities	—		26,322	—	26,322
Non-agency commercial mortgage-backed securities	—		4,715	—	4,715
Asset-backed securities and other debt securities	—		5,842	—	5,842
Available-for-sale debt and other securities(a)	2,495		48,134	—	50,629
Trading debt securities:
U.S. Treasury and federal agencies securities	23		22	—	45
Obligations of states and political subdivisions securities	—		14	—	14
Agency residential mortgage-backed securities	—		8	—	8
Asset-backed securities and other debt securities	—		347	—	347
Trading debt securities	23		391	—	414
Equity securities	306		11	—	317
Residential mortgage loans held for sale	—		600	—	600
Residential mortgage loans(b)	—		—	123	123
Servicing rights	—		—	1,746	1,746
Derivative assets:
Interest rate contracts	12		1,222	7	1,241
Foreign exchange contracts	—		454	—	454
Commodity contracts	56		1,422	—	1,478
Derivative assets(c)	68		3,098	7	3,173
Total assets	$	2,892	52,234	1,876	57,002
Liabilities:
Derivative liabilities:
Interest rate contracts	$	7	1,970	8	1,985
Foreign exchange contracts	—		422	—	422
Equity contracts	—		—	195	195
Commodity contracts	92		1,258	—	1,350
Derivative liabilities(d)	99		3,650	203	3,952
Short positions:
U.S. Treasury and federal agencies securities	66		—	—	66
Asset-backed securities and other debt securities	—		112	—	112
Short positions(d)	66		112	—	178
Total liabilities	$	165	3,762	203	4,130

(a)Excludes FHLB, FRB and DTCC restricted stock holdings totaling $381, $491 and $2, respectively, at December 31, 2022.

(b)Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.

(c)Included in other assets in the Condensed Consolidated Balance Sheets.

(d)Included in other liabilities in the Condensed Consolidated Balance Sheets.

The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale debt and other securities, trading debt securities and equity securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and equity securities. If quoted market prices are not available, then fair values are estimated using pricing models which primarily utilize quoted prices of securities with similar characteristics. Level 2 securities may include federal agencies securities, obligations of states and political subdivisions securities, agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, asset-backed securities and other debt securities and equity securities. These securities are generally valued using a market approach based on observable prices of securities with similar characteristics.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Residential mortgage loans held for sale

For residential mortgage loans held for sale for which the fair value election has been made, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage-backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.

Residential mortgage loans

For residential mortgage loans for which the fair value election has been made, and that are reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. Therefore, these loans are transferred from Level 2 to Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related loans.

Servicing rights

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal OAS models with certain unobservable inputs, primarily prepayment speed assumptions, OAS and weighted-average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 12 for further information on the assumptions used in the valuation of the Bancorp’s MSRs.

Derivatives

Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorp’s derivative contracts are valued using DCF or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate, foreign exchange and commodity swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. At June 30, 2023 and December 31, 2022, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a total return swap associated with the Bancorp’s sale of Visa, Inc. Class B Shares as well as IRLCs, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.

Under the terms of the total return swap, the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Visa, Inc. Class B Shares into Class A Shares. Additionally, the Bancorp will make a quarterly payment based on Visa’s stock price and the conversion rate of the Visa, Inc. Class B Shares into Class A Shares until the date on which the Covered Litigation is settled. The fair value of the total return swap was calculated using a DCF model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, the timing of the resolution of the Covered Litigation and Visa litigation loss estimates in excess, or shortfall, of the Bancorp’s proportional share of escrow funds.

An increase in the loss estimate or a delay in the resolution of the Covered Litigation would result in an increase in the fair value of the derivative liability; conversely, a decrease in the loss estimate or an acceleration of the resolution of the Covered Litigation would result in a decrease in the fair value of the derivative liability. Refer to Note 17 for additional information on the Covered Litigation.

The net asset fair value of the Bancorp’s IRLCs at June 30, 2023 was $8 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the IRLCs of approximately $3 million and $6 million, respectively. Immediate increases in current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the IRLCs of approximately $3 million and $7 million, respectively. The decrease in fair value of IRLCs due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $1 million and $2 million, respectively, and the increase in fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $1 million and $2 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

Short positions

Where quoted prices are available in an active market, short positions are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated using pricing models which primarily utilize quoted prices of securities with similar characteristics and therefore are classified within Level 2 of the valuation hierarchy. Level 2 securities include asset-backed and other debt securities.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the three months ended June 30, 2023 ($ in millions)	Residential Mortgage Loans		Servicing Rights	Interest Rate Derivatives, Net(a)	Equity Derivatives	Total Fair Value
Balance, beginning of period	$	128	1,725	3	(192)	1,664
Total (losses) gains (realized/unrealized):(b)
Included in earnings	(1)		13	11	(30)	(7)
Purchases/originations	—		26	—	—	26
Settlements	(3)		—	(12)	18	3
Transfers into Level 3(c)	—		—	—	—	—
Balance, end of period	$	124	1,764	2	(204)	1,686
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at June 30, 2023	$	(1)	33	6	(30)	8

(a)Net interest rate derivatives include derivative assets and liabilities of $10 and $8, respectively, as of June 30, 2023.

(b)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at June 30, 2023.

(c)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the three months ended June 30, 2022 ($ in millions)	Residential Mortgage Loans		Servicing Rights	Interest Rate Derivatives, Net(a)	Equity Derivatives	Total Fair Value
Balance, beginning of period	$	145	1,444	(2)	(198)	1,389
Total gains (losses) (realized/unrealized):(b)
Included in earnings	(7)		32	12	(18)	19
Purchases/originations/acquisitions	—		106	4	—	110
Settlements	(6)		—	(6)	17	5
Transfers into Level 3(c)	1		—	—	—	1
Balance, end of period	$	133	1,582	8	(199)	1,524
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at June 30, 2022	$	(7)	65	12	(18)	52

(a)Net interest rate derivatives include derivative assets and liabilities of $17 and $9, respectively, as of June 30, 2022.

(b)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at June 30, 2022.

(c)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the six months ended June 30, 2023 ($ in millions)	Residential Mortgage Loans		Servicing Rights	Interest Rate Derivatives, Net(a)	Equity Derivatives	Total Fair Value
Balance, beginning of period	$	123	1,746	(1)	(195)	1,673
Total (losses) gains (realized/unrealized):(b)
Included in earnings	1		(40)	25	(61)	(75)
Purchases/originations	—		58	(2)	—	56
Settlements	(5)		—	(20)	52	27
Transfers into Level 3(c)	5		—	—	—	5
Balance, end of period	$	124	1,764	2	(204)	1,686
The amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at June 30, 2023	$	1	(3)	6	(61)	(57)

(a)Net interest rate derivatives include derivative assets and liabilities of $10 and $8, respectively, as of June 30, 2023.

(b)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at June 30, 2023.

(c)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the six months ended June 30, 2022 ($ in millions)	Residential Mortgage Loans		Servicing Rights	Interest Rate Derivatives, Net(a)	Equity Derivatives	Total Fair Value
Balance, beginning of period	$	154	1,121	4	(214)	1,065
Total gains (losses) (realized/unrealized):(b)
Included in earnings	(13)		169	13	(29)	140
Purchases/originations/acquisitions	—		292	2	—	294
Settlements	(15)		—	(11)	44	18
Transfers into Level 3(c)	7		—	—	—	7
Balance, end of period	$	133	1,582	8	(199)	1,524
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at June 30, 2022	$	(13)	267	13	(29)	238

(a)Net interest rate derivatives include derivative assets and liabilities of $17 and $9, respectively, as of June 30, 2022.

(b)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at June 30, 2022.

(c)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.

The total losses and gains included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Condensed Consolidated Statements of Income as follows:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Mortgage banking net revenue	$	22	36	(16)	167
Commercial banking revenue	1		1	2	2
Other noninterest income	(30)		(18)	(61)	(29)
Total (losses) gains	$	(7)	19	(75)	140

The total losses and gains included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at June 30, 2023 and 2022 were recorded in the Condensed Consolidated Statements of Income as follows:


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2023		2022	2023	2022
Mortgage banking net revenue	$	37	69	2	265
Commercial banking revenue	1		1	2	2
Other noninterest income	(30)		(18)	(61)	(29)
Total (losses) gains	$	8	52	(57)	238

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present information as of June 30, 2023 and 2022 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis:


As of June 30, 2023 ($ in millions)
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs			Weighted-Average
Residential mortgage loans	$	124	Loss rate model	Interest rate risk factor	(23.5)	-	5.5%		(11.8)	%	(a)
				Credit risk factor	—	-	1.1%		0.2	%	(a)
								(Fixed)	5.2	%	(b)
Servicing rights	1,764		DCF	Prepayment speed	—	-	100.0%	(Adjustable)	20.3	%	(b)
								(Fixed)	628		(b)
				OAS (bps)	477	-	1,447	(Adjustable)	1,204		(b)
IRLCs, net	8		DCF	Loan closing rates	30.2	-	97.5%		82.9	%	(c)
Swap associated with the sale of Visa, Inc. Class B Shares	(204)		DCF	Timing of the resolution of the Covered Litigation	Q3 2024	-	Q1 2027	Q3 2025			(d)

(a)Unobservable inputs were weighted by the relative carrying value of the instruments.

(b)Unobservable inputs were weighted by the relative unpaid principal balance of the instruments.

(c)Unobservable inputs were weighted by the relative notional amount of the instruments.

(d)Unobservable inputs were weighted by the probability of the final funding date of the instruments.


As of June 30, 2022 ($ in millions)
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs			Weighted-Average
Residential mortgage loans	$	133	Loss rate model	Interest rate risk factor	(19.2)	-	4.4 %		(8.3)	%	(a)
				Credit risk factor	—	-	23.3 %		0.2	%	(a)
								(Fixed)	5.3	%	(b)
Servicing rights	1,582		DCF	Prepayment speed	—	-	100.0 %	(Adjustable)	20.3	%	(b)
								(Fixed)	796		(b)
				OAS (bps)	615	-	1,513	(Adjustable)	1,204		(b)
IRLCs, net	11		DCF	Loan closing rates	34.5	-	98.5 %		86.9	%	(c)
Swap associated with the sale of Visa, Inc. Class B Shares	(199)		DCF	Timing of the resolution of the Covered Litigation	Q3 2023	-	Q3 2026	Q4 2024			(d)

(a)Unobservable inputs were weighted by the relative carrying value of the instruments.

(b)Unobservable inputs were weighted by the relative unpaid principal balance of the instruments.

(c)Unobservable inputs were weighted by the relative notional amount of the instruments.

(d)Unobservable inputs were weighted by the probability of the final funding date of the instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

The following tables provide the fair value hierarchy and carrying amount of all assets that were held as of June 30, 2023 and 2022, and for which a nonrecurring fair value adjustment was recorded during the three and six months ended June 30, 2023 and 2022, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.


	Fair Value Measurements Using					Total Losses
As of June 30, 2023 ($ in millions)	Level 1		Level 2	Level 3	Total	For the three months ended June 30, 2023	For the six months ended June 30, 2023
Commercial loans held for sale	$	—	—	7	7	—	—
Commercial loans and leases	—		—	171	171	(21)	(97)
Consumer and residential mortgage loans	—		—	193	193	(6)	(8)
OREO	—		—	5	5	(1)	(1)
Bank premises and equipment	—		—	4	4	—	(1)

Private equity investments	—		—	—	—	(1)	(2)
Total	$	—	—	380	380	(29)	(109)

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


	Fair Value Measurements Using					Total (Losses) Gains
As of June 30, 2022 ($ in millions)	Level 1		Level 2	Level 3	Total	For the three months ended June 30, 2022	For the six months ended June 30, 2022

Commercial loans and leases	—		—	180	180	(15)	(47)
Consumer and residential mortgage loans	—		—	115	115	—	—
OREO	—		—	2	2	—	1
Bank premises and equipment	—		—	2	2	(1)	(1)
Operating lease equipment	—		—	5	5	—	(2)
Private equity investments	—		9	—	9	(1)	(7)
Total	$	—	9	304	313	(17)	(56)

As of June 30, 2023 ($ in millions)

Financial Instrument

Fair Value

Valuation Technique

Significant Unobservable Inputs

Ranges of
Inputs

Weighted-Average

Commercial loans held for sale

Comparable company analysis

Market comparable transactions

Commercial loans and leases

171

Appraised value

Collateral value

Consumer and residential mortgage loans

193

Appraised value

Collateral value

OREO

Appraised value

Bank premises and equipment

Appraised value

Private equity investments

—

Comparable company analysis

Market comparable transactions

As of June 30, 2022 ($ in millions)

Financial Instrument

Fair Value

Valuation Technique

Significant Unobservable Inputs

Ranges of
Inputs

Weighted-Average

Commercial loans and leases

180

Appraised value

Collateral value

Consumer and residential mortgage loans

115

Appraised value

Collateral value

OREO

Appraised value

Bank premises and equipment

Appraised value

Operating lease equipment

Appraised value

Commercial loans held for sale

The Bancorp estimated the fair value of certain commercial loans held for sale during the three and six months ended June 30, 2023 and 2022. These valuations were based on appraisals of the underlying collateral or by applying unobservable inputs such as an estimated market discount to the unpaid principal balance of the loans or the appraised values of the assets (Level 3 of the valuation hierarchy).

Portfolio loans and leases

During the three and six months ended June 30, 2023 and 2022, the Bancorp recorded nonrecurring adjustments to certain collateral-dependent portfolio loans and leases. When a loan is collateral-dependent, the fair value of the loan is generally based on the fair value less cost to sell of the underlying collateral supporting the loan and therefore these loans were classified within Level 3 of the valuation hierarchy. In cases where the amortized cost basis of the loan or lease exceeds the estimated net realizable value of the collateral, then an ALLL is recognized, or a charge-off once the remaining amount is considered uncollectible.

OREO

During the three and six months ended June 30, 2023 and 2022, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties and branch-related real estate no longer intended to be used for banking purposes classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring losses were primarily due to declines in real estate values of the properties recorded in OREO. These losses include an immaterial amount in losses recorded as charge-offs on new OREO properties transferred from loans during the three and six months ended June 30, 2023 and 2022. These losses also included $1 million recorded as negative fair value adjustments for both the three and six months ended June 30, 2023, respectively and an immaterial amount recorded as negative fair value adjustments and $1 million recorded as positive fair value adjustments for properties subsequent to their transfer into OREO for the three and six months ended June 30, 2022, respectively. The fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

Bank premises and equipment

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. These properties were written down to their lower of cost or market values. At least annually thereafter, the Bancorp will review these properties for market fluctuations. The fair value amounts were generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. For further information on bank premises and equipment, refer to Note 7.

Operating lease equipment

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. When evaluating whether an individual asset is impaired, the Bancorp considers the current fair value of the asset, the changes in overall market demand for the asset and the rate of change in advancements associated with technological improvements that impact the demand for the specific asset under review. As part of this ongoing assessment, the Bancorp determined that the carrying values of certain operating lease equipment were not recoverable and, as a result, the Bancorp recorded an impairment loss equal to the amount by which the carrying value of the assets exceeded the fair value. The fair value amounts were generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy.

Private equity investments

The Bancorp accounts for its private equity investments using the measurement alternative to fair value, except for those accounted for under the equity method of accounting. Under the measurement alternative, the Bancorp carries each investment at its cost basis minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Bancorp did not recognize gains during the three and six months ended June 30, 2023 and recognized gains of an immaterial amount and $4 million during the three and six months ended June 30, 2022, respectively, resulting from observable price changes. The carrying value of the Bancorp’s private equity investments still held as of June 30, 2023 includes a cumulative $40 million of positive adjustments as a result of observable price changes since January 1, 2018. Because these adjustments are based on observable transactions in inactive markets, they are classified in Level 2 of the fair value hierarchy.

For private equity investments which are accounted for using the measurement alternative to fair value, the Bancorp qualitatively evaluates each investment quarterly to determine if impairment may exist. If necessary, the Bancorp then measures impairment by estimating the value of its investment and comparing that to the investment’s carrying value, whether or not the Bancorp considers the impairment to be temporary. These valuations are typically developed using a DCF method, but other methods may be used if more appropriate for the circumstances. These valuations are based on unobservable inputs and therefore are classified in Level 3 of the fair value hierarchy. The Bancorp recognized impairment charges of $1 million and $2 million for the three and six months ended June 30, 2023, respectively, and $1 million and $11 million for the three and six months ended June 30, 2022, respectively. The carrying value of the Bancorp’s private equity investments still held as of June 30, 2023 includes a cumulative $31 million of impairment charges recognized since adoption of the measurement alternative to fair value on January 1, 2018.

Fair Value Option

The Bancorp elected to measure certain residential mortgage loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Management’s intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp’s loan portfolio. In such cases, the loans will continue to be measured at fair value.

Fair value changes recognized in earnings for residential mortgage loans held at June 30, 2023 and 2022 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included losses of $13 million and $9 million, respectively. These losses are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

Valuation adjustments related to instrument-specific credit risk for residential mortgage loans measured at fair value negatively impacted the fair value of those loans by an immaterial amount and $1 million at June 30, 2023 and December 31, 2022, respectively. Interest on loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Condensed Consolidated Statements of Income.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the difference between the fair value and the unpaid principal balance for residential mortgage loans measured at fair value as of:


June 30, 2023 ($ in millions)	Aggregate Fair Value		Aggregate Unpaid Principal Balance	Difference
Residential mortgage loans measured at fair value	$	720	733	(13)

Nonaccrual loans	3		3	—
December 31, 2022
Residential mortgage loans measured at fair value	$	723	733	(10)
Past due loans of 30-89 days or more	1		1	—
Nonaccrual loans	2		2	—

The Bancorp may invest in certain hybrid financial instruments with embedded derivatives that are not clearly and closely related to the host contracts. The Bancorp elected to measure the entire instrument at fair value with changes in fair value recognized in earnings. The Bancorp did not hold these investments as of June 30, 2023 and December 31, 2022. Fair value changes recognized in earnings included gains of zero for both the three and six months ended June 30, 2023 and gains of zero and $11 million for the three and six months ended June 30, 2022, respectively, reported in securities gains (losses), net in the Condensed Consolidated Statements of Income.

Fair Value of Certain Financial Instruments

The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis:


	Net Carrying Amount		Fair Value Measurements Using			Total Fair Value
As of June 30, 2023 ($ in millions)			Level 1	Level 2	Level 3
Financial assets:
Cash and due from banks	$	2,594	2,594	—	—	2,594
Other short-term investments	10,943		10,943	—	—	10,943
Other securities	836		—	836	—	836
Held-to-maturity securities	2		—	—	2	2
Loans and leases held for sale	164		—	—	167	167
Portfolio loans and leases:
Commercial loans and leases	75,153		—	—	75,176	75,176
Consumer and residential mortgage loans	44,287		—	—	41,085	41,085
Total portfolio loans and leases, net	$	119,440	—	—	116,261	116,261
Financial liabilities:
Deposits	$	164,128	—	164,047	—	164,047
Federal funds purchased	163		163	—	—	163
Other short-term borrowings	5,817		—	5,813	—	5,813
Long-term debt	12,384		11,467	408	—	11,875


	Net Carrying Amount		Fair Value Measurements Using			Total Fair Value
As of December 31, 2022 ($ in millions)			Level 1	Level 2	Level 3
Financial assets:
Cash and due from banks	$	3,466	3,466	—	—	3,466
Other short-term investments	8,351		8,351	—	—	8,351
Other securities	874		—	874	—	874
Held-to-maturity securities	5		—	—	5	5
Loans and leases held for sale	407		—	—	414	414
Portfolio loans and leases:
Commercial loans and leases	75,262		—	—	75,104	75,104
Consumer and residential mortgage loans	43,901		—	—	42,193	42,193
Total portfolio loans and leases, net	$	119,163	—	—	117,297	117,297
Financial liabilities:
Deposits	$	163,690	—	163,634	—	163,634
Federal funds purchased	180		180	—	—	180
Other short-term borrowings	4,838		—	4,829	—	4,829
Long-term debt	13,778		13,218	411	—	13,629

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

23. Business Segments

The Bancorp reports on three business segments: Commercial Banking, Consumer & Small Business Banking and Wealth and Asset Management. 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 the 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 following is a description of each of the Bancorp’s business segments and the products and services they provide to their respective client bases.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present the results of operations and assets by business segment for the three months ended:


June 30, 2023 ($ in millions)	Commercial Banking		Consumer and Small Business Banking	Wealth and Asset Management	General Corporate and Other		Eliminations		Total
Net interest income	$	1,021	1,370	95	(1,029)		—		1,457
Provision for (benefit from) credit losses	(9)		65	—	121		—		177
Net interest income after provision for (benefit from) credit losses	$	1,030	1,305	95	(1,150)		—		1,280
Noninterest income:
Commercial banking revenue	$	147	1	—	(2)		—		146
Wealth and asset management revenue	—		52	135	2		(46)	(a)	143
Service charges on deposits	92		53	—	(1)		—		144
Card and processing revenue	23		79	1	3		—		106
Mortgage banking net revenue	—		59	—	—		—		59
Leasing business revenue	47		—	—	—		—		47
Other noninterest income	28		27	1	18		—		74
Securities gains (losses), net	(1)		—	—	8		—		7
Securities losses, net – non-qualifying hedges on MSRs	—		—	—	—		—		—
Total noninterest income	$	336	271	137	28		(46)		726
Noninterest expense:
Compensation and benefits	$	153	222	55	220		—		650
Technology and communications	3		6	—	105		—		114
Net occupancy expense	10		52	3	18		—		83
Equipment expense	7		10	—	19		—		36
Leasing business expense	31		—	—	—		—		31
Marketing expense	1		18	—	12		—		31
Card and processing expense	2		19	—	(1)		—		20
Other noninterest expense	279		305	81	(353)		(46)		266
Total noninterest expense	$	486	632	139	20		(46)		1,231
Income (loss) before income taxes	$	880	944	93	(1,142)		—		775
Applicable income tax expense (benefit)	169		198	20	(213)		—		174
Net income (loss)	$	711	746	73	(929)		—		601
Total goodwill	$	2,324	2,369	226	—		—		4,919
Total assets	$	83,238	85,755	10,691	27,592	(b)	—		207,276

(a)Revenue sharing agreements between Wealth and Asset Management and Consumer and Small Business Banking are eliminated in the Condensed Consolidated Statements of Income.

(b)Includes bank premises and equipment of $22 classified as held for sale. For more information, refer to Note 7.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


June 30, 2022 ($ in millions)	Commercial Banking		Consumer and Small Business Banking	Wealth and Asset Management	General Corporate and Other		Eliminations		Total
Net interest income	$	553	631	53	102		—		1,339
Provision for credit losses	80		29	—	70		—		179
Net interest income after provision for credit losses	$	473	602	53	32		—		1,160
Noninterest income:
Commercial banking revenue	$	137	1	—	(1)		—		137
Wealth and asset management revenue	1		51	132	—		(44)	(a)	140
Service charges on deposits	97		57	—	—		—		154
Card and processing revenue	22		79	1	3		—		105
Mortgage banking net revenue	—		31	—	—		—		31
Leasing business revenue	56		—	—	—		—		56
Other noninterest income(b)	43		22	(1)	21		—		85
Securities losses, net	—		—	—	(32)		—		(32)
Securities losses, net – non-qualifying hedges on MSRs	—		—	—	—		—		—
Total noninterest income	$	356	241	132	(9)		(44)		676
Noninterest expense:
Compensation and benefits	$	153	207	56	168		—		584
Technology and communications	2		5	—	91		—		98
Net occupancy expense(d)	10		50	3	12		—		75
Equipment expense	7		10	—	19		—		36
Leasing business expense	31		—	—	—		—		31
Marketing expense	1		13	—	14		—		28
Card and processing expense	3		18	—	(1)		—		20
Other noninterest expense	235		277	78	(306)		(44)		240
Total noninterest expense	$	442	580	137	(3)		(44)		1,112
Income before income taxes	$	387	263	48	26		—		724
Applicable income tax expense	70		55	10	27		—		162
Net income (loss)	$	317	208	38	(1)		—		562
Total goodwill	$	1,946	2,302	226	452	(e)	—		4,926
Total assets	$	82,058	85,424	13,062	26,238	(c)	—		206,782

(a)Revenue sharing agreements between Wealth and Asset Management and Consumer and Small Business Banking are eliminated in the Condensed Consolidated Statements of Income.

(b)Includes impairment charges of $1 for bank premises and equipment recorded in Consumer and Small Business Banking. For more information, refer to Note 7 and Note 22.

(c)Includes bank premises and equipment of $24 classified as held for sale. For more information, refer to Note 7.

(d)Includes impairment losses and termination charges of $1 for ROU assets related to certain operating leases. For more information, refer to Note 9.

(e)Due to the timing of a business acquisition, the Bancorp was in the process of completing its analysis of the allocation of the goodwill across its business segments, therefore goodwill was presented as part of General Corporate and Other as of June 30, 2022.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables present the results of operations and assets by business segment for the six months ended:


June 30, 2023 ($ in millions)	Commercial Banking		Consumer and Small Business Banking	Wealth and Asset Management	General Corporate and Other		Eliminations		Total
Net interest income	$	1,997	2,628	196	(1,847)		—		2,974
Provision for credit losses	37		116	—	188		—		341
Net interest income after provision for credit losses	1,960		2,512	196	(2,035)		—		2,633
Noninterest income:
Commercial banking revenue	305		2	—	—		—		307
Wealth and asset management revenue	1		106	274	—		(92)	(a)	289
Service charges on deposits	180		103	—	(2)		—		281
Card and processing revenue	45		155	1	5		—		206
Mortgage banking net revenue	—		127	—	—		—		127
Leasing business revenue	104		—	—	—		—		104
Other noninterest income(b)	44		52	—	1		—		97
Securities gains (losses), net	(8)		—	—	19		—		11
Securities losses, net – non-qualifying hedges on MSRs	—		—	—	—		—		—
Total noninterest income	671		545	275	23		(92)		1,422
Noninterest expense:
Compensation and benefits	343		446	116	502		—		1,407
Technology and communications	5		13	—	214		—		232
Net occupancy expense(d)	20		104	6	34		—		164
Equipment expense	14		21	—	38		—		73
Leasing business expense	65		—	—	—		—		65
Marketing expense	1		35	1	23		—		60
Card and processing expense	5		38	—	(1)		—		42
Other noninterest expense	583		619	163	(754)		(92)		519
Total noninterest expense	1,036		1,276	286	56		(92)		2,562
Income (loss) before income taxes	1,595		1,781	185	(2,068)		—		1,493
Applicable income tax expense (benefit)	305		373	39	(383)		—		334
Net income (loss)	1,290		1,408	146	(1,685)		—		1,159
Total goodwill	$	2,324	2,369	226	—		—		4,919
Total assets	$	83,238	85,755	10,691	27,592	(c)	—		207,276

(a)Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income.

(b)Includes impairment charges of $1 for bank premises and equipment recorded in Consumer and Small Business Banking. For more information, refer to Note 7 and Note 22.

(c)Includes bank premises and equipment of $22 classified as held for sale. For more information, refer to Note 7.

(d)Includes impairment losses and termination charges of $1 for ROU assets related to certain operating leases. For more information, refer to Note 9.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)


June 30, 2022 ($ in millions)	Commercial Banking			Consumer and Small Business Banking	Wealth and Asset Management	General Corporate and Other		Eliminations		Total
Net interest income	$	1,076		1,148	88	222		—		2,534
Provision for credit losses	46			59	—	119		—		224
Net interest income after provision for credit losses	1,030			1,089	88	103		—		2,310
Noninterest income:
Commercial banking revenue	272			1	—	(1)		—		272
Wealth and asset management revenue	1			102	274	—		(88)	(a)	289
Service charges on deposits	196			111	—	(1)		—		306
Card and processing revenue	43			152	1	5		—		201
Mortgage banking net revenue	—			82	1	—		—		83
Leasing business revenue	118		(c)	—	—	—		—		118
Other noninterest income(b)	65			49	—	24		—		138
Securities losses, net	—			—	—	(47)		—		(47)
Securities losses, net – non-qualifying hedges on MSRs	—			(1)	—	—		—		(1)
Total noninterest income	695			496	276	(20)		(88)		1,359
Noninterest expense:
Compensation and benefits	335			425	116	419		—		1,295
Technology and communications	7			8	—	184		—		199
Net occupancy expense(e)	20			98	6	28		—		152
Equipment expense	14			18	—	40		—		72
Leasing business expense	63			—	—	—		—		63
Marketing expense	2			24	1	25		—		52
Card and processing expense	5			35	—	(2)		—		38
Other noninterest expense	475			571	157	(652)		(88)		463
Total noninterest expense	921			1,179	280	42		(88)		2,334
Income before income taxes	804			406	84	41		—		1,335
Applicable income tax expense	147			85	18	29		—		279
Net income	657			321	66	12		—		1,056
Total goodwill	$	1,946		2,302	226	452	(f)	—		4,926
Total assets	$	82,058		85,424	13,062	26,238	(d)	—		206,782

(a)Revenue sharing agreements between wealth and asset management and branch banking are eliminated in the Condensed Consolidated Statements of Income.

(b)Includes impairment charges of $1 for bank premises and equipment recorded in Consumer and Small Business Banking. For more information, refer to Note 7 and Note 22.

(c)Includes impairment charges of $2 for operating lease equipment. For more information, refer to Note 8 and Note 22.

(d)Includes bank premises and equipment of $24 classified as held for sale. For more information, refer to Note 7.

(e)Includes impairment losses and termination charges of $2 for ROU assets related to certain operating leases. For more information, refer to Note 9.

(f)Due to the timing of a business acquisition, the Bancorp was in the process of completing its analysis of the allocation of the goodwill across its business segments, therefore goodwill was presented as part of General Corporate and Other as of June 30, 2022.

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Fifth Third Bancorp and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)

24. Subsequent Event

On July 27, 2023, the Bancorp issued and sold $1.25 billion of fixed-rate/floating-rate senior notes which will mature on July 27, 2029. The senior notes will bear interest at a rate of 6.339% per annum to, but excluding, July 27, 2028. From, and including July 27, 2028 until, but excluding July 27, 2029, the senior notes will bear interest at a rate of compounded SOFR plus 2.340%. The senior notes are redeemable in whole at par plus accrued and unpaid interest one year prior to their maturity date, or may be wholly or partially redeemed on or after 30 days prior to maturity. Additionally, the senior notes are redeemable at the Bancorp’s option, in whole or in part, beginning 180 days after the issue date and prior to July 27, 2028, at the greater of: (a) the aggregate principal amount of the senior notes being redeemed, or (b) the discounted present value of the remaining scheduled payments of principal and interest that would be due if the senior notes being redeemed matured on July 27, 2028.

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PART II. OTHER INFORMATION

Legal Proceedings (Item 1)

Refer to Note 18 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings.

Risk Factors (Item 1A)

The following is a change to the risk factors as previously disclosed in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 as updated by the Bancorp’s subsequent Quarterly Report on Form 10-Q:

Recent bank failures have created significant market volatility and regulatory uncertainty which could have a material adverse effect on our business and financial condition.

In response to recent bank failures, the United States government, particularly the U.S. Treasury, the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC and/or the U.S. Congress, is expected to adopt a variety of measures and new regulations designed to strengthen capital and liquidity standards and otherwise restore confidence in financial institutions. These reforms are expected to modify liquidity, long-term debt, and capital requirements and enhance existing stress testing frameworks as well as include special assessments to recover losses to the Deposit Insurance Fund.

Even without revisions to the regulatory framework, an enhanced level of scrutiny and escalation from our regulators could negatively impact our business activities as our regulators perform reviews of, among other things, our liquidity, capital, stress testing and risk management programs and may require us to enhance our liquidity position and take other steps regarding risk management. Under applicable banking laws such regulatory actions may not be disclosed to the public.

These actions could limit our business activities (including lending) and our ability to expand organically or through acquisitions. They could also result in our taking steps to increase our capital that may be dilutive to shareholders or limit our ability to pay dividends or otherwise return capital to shareholders.

In the current environment, we may also experience deposit volatility as customers react to adverse events impacting the banking industry in general or other specific institutions. As deposits remain our primary source of funding, we may be unable to maintain sufficient liquidity to meet our commitments, including commitments to depositors withdrawing funds, or be required to raise deposit interest rates which would adversely impact our net interest margin. Our failure to effectively manage and maintain adequate liquidity to satisfy our commitments would have a material adverse effect on our business, results of operations or financial condition.

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

Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I, Item 2 for information regarding purchases and sales of equity securities by the Bancorp during the second quarter of 2023.

Defaults Upon Senior Securities (Item 3)

None.

Mine Safety Disclosures (Item 4)

Not applicable.

Other Information (Item 5)

None.

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Exhibits (Item 6)


3.1			Amended Articles of Incorporation of Fifth Third Bancorp. Incorporated by reference to Exhibit 3.1 of the Registrant ’s Quarterly Report on Form 10-Q filed on May 7, 2021.
3.2			Regulations of Fifth Third Bancorp, as Amended as of April 12, 2022. Incorporated by reference to Exhibit 3.2 of the Registrant’s Quarterly Report on Form 10-Q filed on May 9, 2022.
10.1			2023 Restricted Stock Unit Grant Agreement (for Directors).*
31(i)			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31(ii)			Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32(i)			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32(ii)			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
101.INS			Inline XBRL Instance Document.
101.SCH			Inline XBRL Taxonomy Extension Schema.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase.
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase.
101.DEF			Inline XBRL Taxonomy Definition Linkbase.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



*Denotes management contract or compensation plan or arrangement.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Fifth Third Bancorp
Registrant

Date: August 7, 2023


/s/ James C. Leonard
James C. Leonard
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer & Principal Financial Officer)

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Fifth Third Bancorp (FITB) 10-Q2023 Q2 Quarterly report

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