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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 September 30, 2020
Commission File Number 001-33653

FITB-20200930_G1.JPG
(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 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. (Check one):
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 712,419,920 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2020.


Table of Contents
FITB-20200930_G2.GIF
FINANCIAL CONTENTS
Part I. Financial Information
2
3
4
5
10
12
12
15
26
33
42
43
61
67
69
70
71
74
75
75
76
76
77
78
79
81
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Part II. Other Information
153
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155

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. These statements relate to our financial condition, results of operations, plans, objectives, future performance 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. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. 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; (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; and (43) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.
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Table of Contents
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
GNMA: Government National Mortgage Association
AFS: Available-For-Sale
GSE: United States Government Sponsored Enterprise
ALCO: Asset Liability Management Committee
HTM: Held-To-Maturity
ALLL: Allowance for Loan and Lease Losses
IPO: Initial Public Offering
AOCI: Accumulated Other Comprehensive Income (Loss)
IRC: Internal Revenue Code
APR: Annual Percentage Rate
IRLC: Interest Rate Lock Commitment
ARM: Adjustable Rate Mortgage
ISDA: International Swaps and Derivatives Association, Inc.
ASC: Accounting Standards Codification
LIBOR: London Interbank Offered Rate
ASU: Accounting Standards Update
LIHTC: Low-Income Housing Tax Credit
ATM: Automated Teller Machine
LLC: Limited Liability Company
BHC: Bank Holding Company
LTV: Loan-to-Value Ratio
BOLI: Bank Owned Life Insurance
MD&A: Management’s Discussion and Analysis of Financial
BPO: Broker Price Opinion
Condition and Results of Operations
bps: Basis Points
MSR: Mortgage Servicing Right
CCAR: Comprehensive Capital Analysis and Review
N/A: Not Applicable
CDC: Fifth Third Community Development Corporation
NII: Net Interest Income
CECL: Current Expected Credit Loss
NM: Not Meaningful
CET1: Common Equity Tier 1
OAS: Option-Adjusted Spread
CFPB: United States Consumer Financial Protection Bureau
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
OTTI: Other-Than-Temporary Impairment
DTI: Debt-to-Income Ratio
PCI: Purchased Credit Impaired
ERM: Enterprise Risk Management
PCD: Purchased Credit Deteriorated
ERMC: Enterprise Risk Management Committee
PPP: Paycheck Protection Program
EVE: Economic Value of Equity
RCC: Risk Compliance Committee
FASB: Financial Accounting Standards Board
ROU: Right-of-Use
FDIC: Federal Deposit Insurance Corporation
SAR: Stock Appreciation Right
FHA: Federal Housing Administration
SBA: Small Business Administration
FHLB: Federal Home Loan Bank
SEC: United States Securities and Exchange Commission
FHLMC: Federal Home Loan Mortgage Corporation
SOFR: Secured Overnight Financing Rate
FICO: Fair Isaac Corporation (credit rating)
TBA: To Be Announced
FINRA: Financial Industry Regulatory Authority
TDR: Troubled Debt Restructuring
FNMA: Federal National Mortgage Association
TILA: Truth in Lending Act
FOMC: Federal Open Market Committee
U.S.: United States of America
FRB: Federal Reserve Bank
U.S. GAAP: United States Generally Accepted Accounting
FTE: Fully Taxable Equivalent
Principles
FTP: Funds Transfer Pricing
VA: United States Department of Veterans Affairs
FTS: Fifth Third Securities
VIE: Variable Interest Entity
GDP: Gross Domestic Product
VRDN: Variable Rate Demand Note


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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.


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Table of Contents
TABLE 1: Selected Financial Data
For the three months ended
September 30,
% For the nine months ended
September 30,
%
($ in millions, except for per share data) 2020 2019 Change 2020 2019 Change
Income Statement Data
Net interest income (U.S. GAAP) $ 1,170  1,242  (6) $ 3,600  3,569  1
Net interest income (FTE)(a)(b)
1,173  1,246  (6) 3,610  3,582  1
Noninterest income 722  740  (2) 2,043  2,501  (18)
Total revenue (FTE)(a)
1,895  1,986  (5) 5,653  6,083  (7)
Provision for (benefit from) credit losses(c)
(15) 134  NM 1,110  310  258
Noninterest expense 1,161  1,159  3,482  3,499 
Net income 581  549  6 823  1,778  (54)
Net income available to common shareholders 562  530  6 754  1,718  (56)
Common Share Data
Earnings per share - basic $ 0.78  0.72  8 $ 1.05  2.40  (56)
Earnings per share - diluted 0.78  0.71  10 1.04  2.37  (56)
Cash dividends declared per common share 0.27  0.24  13 0.81  0.70  16
Book value per share 29.25  27.32  7 29.25  27.32  7
Market value per share 21.32  27.38  (22) 21.32  27.38  (22)
Financial Ratios
Return on average assets 1.14  % 1.28  (11) 0.58  % 1.47  (61)
Return on average common equity 10.7  10.7  - 4.9  12.7  (61)
Return on average tangible common equity(b)
13.8  14.2  (3) 6.5  16.5  (61)
Dividend payout 34.6  33.3  4 77.1  29.2  164
Average total Bancorp shareholders’ equity
    as a percent of average assets
11.33  12.43  (9) 11.71  11.99  (2)
Tangible common equity as a percent of tangible
    assets (excluding AOCI)(b)
6.99  8.21  (15) 6.99  8.21  (15)
Net interest margin(a)(b)
2.58  3.32  (22) 2.85  3.32  (14)
Net interest rate spread (a)(b)
2.42  2.93  (17) 2.62  2.92  (10)
Efficiency(a)(b)
61.3  58.4  5 61.6  57.5  7
Credit Quality
Net losses charged off $ 101  99  2 $ 353  256  38
Net losses charged off as a percent of average portfolio
loans and leases
0.35  % 0.36  (3) 0.41  % 0.32  28
ALLL as a percent of portfolio loans and leases 2.32  1.04  123 2.32  1.04  123
ACL as a percent of portfolio loans and leases(d)
2.49  1.19  109 2.49  1.19  109
Nonperforming portfolio assets as a percent of portfolio
loans and leases and OREO
0.84  0.47  79 0.84  0.47  79
Average Balances
Loans and leases, including held for sale $ 114,613  110,666  4 $ 115,401  106,719  8
Securities and other short-term investments 66,091  38,188  73 54,021  37,369  45
Total assets 202,533  169,585  19 190,973  162,119  18
Transaction deposits(e)
148,567  114,541  30 136,293  109,396  25
Core deposits(f)
152,278  120,364  27 140,695  114,853  23
Wholesale funding(g)
21,762  22,492  (3) 22,441  22,772  (1)
Bancorp shareholders’ equity 22,952  21,087  9 22,364  19,430  15
Regulatory Capital(h)
CET1 capital 10.14  % 9.56  6 10.14  % 9.56  6
Tier I risk-based capital 11.64  10.81  8 11.64  10.81  8
Total risk-based capital 14.93  13.68  9 14.93  13.68  9
Tier I leverage 8.37  9.36  (11) 8.37  9.36  (11)
(a)Amounts presented on an FTE basis. The FTE adjustments were $3 and $4 for the three months ended September 30, 2020 and 2019, respectively, and $10 and $13 for the nine months ended September 30, 2020 and 2019, respectively.
(b)These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
(c)The provision for credit losses is the sum of the provision for loan and lease losses and the provision for the reserve for unfunded commitments.
(d)The ACL is the sum of the ALLL and the reserve for unfunded commitments.
(e)Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.
(f)Includes transaction deposits and other time deposits.
(g)Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.
(h)Regulatory capital ratios as of September 30, 2020 are calculated pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
OVERVIEW
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At September 30, 2020, the Bancorp had $202 billion in assets and operated 1,122 full-service banking centers and 2,414 Fifth Third branded ATMs in eleven states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending 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, 2019. 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 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 September 30, 2020, net interest income on an FTE basis and noninterest income provided 62% and 38% of total revenue, respectively. For the nine months ended September 30, 2020, net interest income on an FTE basis and noninterest income provided 64% and 36% 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 nine months ended September 30, 2020. 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 service charges on deposits, wealth and asset management revenue, commercial banking revenue, mortgage banking net revenue, card and processing revenue, leasing business revenue, other noninterest income and net securities gains or losses. Noninterest expense includes compensation and benefits, technology and communications costs, net occupancy expense, leasing business expense, equipment expense, card and processing expense, marketing expense and other noninterest expense.

COVID-19 Global Pandemic
The COVID-19 pandemic has introduced significant economic uncertainty during the three and nine months ended September 30, 2020. To address concerns that COVID-19 may overwhelm the health care system, states across the U.S. declared lockdowns that restricted social gatherings and ordered temporary closures of businesses deemed non-essential. Despite the partial lifting of these measures in some of the states in the Bancorp’s geographic footprint, the recent fluctuations in the number of COVID-19 cases mean that it remains unknown when there will be a return to normal economic activity. During the third quarter of 2020, the Bancorp observed the impact of the pandemic on its business. The decline of asset prices, reduction in interest rates, widening of credit spreads, borrower and counterparty credit deterioration and market volatility had the most immediate negative impacts on current performance. Although the Bancorp is unable to estimate the extent of the impact, the continuing pandemic and related global economic crisis will adversely impact its future operating results.

As the cases of COVID-19 continued to rise, the disruption in the financial markets led the FRB to enact unprecedented policies to offset forced liquidations and restore liquidity in the financial markets. The FRB cut rates to the zero lower bound, announced unlimited purchases
5


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
of treasuries along with agency mortgage-backed securities and commercial mortgage-backed securities, and announced several facilities designed to support the smooth functioning of credit markets.

Government Response to the COVID-19 Pandemic
Congress, the FRB and the other U.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic. The descriptions below summarize certain significant government actions taken in response to the COVID-19 pandemic. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.

The CARES Act
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020 and has subsequently been amended several times. Among other provisions, the CARES Act includes funding for the SBA to expand lending, relief from certain U.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as TDRs and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts. One of the key CARES Act programs is the Paycheck Protection Program, which temporarily expanded the SBA’s business loan guarantee program. Paycheck Protection Program loans were available to a broader range of entities than ordinary SBA loans, deferred principal and interest repayment and may be forgiven if the borrower demonstrates that the loan proceeds were used for qualified payroll costs and certain other expenses.

The CARES Act contains additional protections for homeowners and renters of properties with federally-backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning on March 18, 2020 and a 120-day moratorium on initiating eviction proceedings effective March 27, 2020. Borrowers of federally-backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the COVID-19 public health emergency. The Federal Housing Administration, Fannie Mae and Freddie Mac have independently extended their moratorium on foreclosures and evictions for single-family federally backed mortgages until at least December 31, 2020.

Also pursuant to the CARES Act, the U.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds have been used to support several FRB programs and facilities described below or additional programs or facilities that are established by its authority under Section 13(3) of the Federal Reserve Act and meeting certain criteria.

FRB Actions
The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020.

In addition, the FRB has established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to, U.S. companies, financial institutions, municipalities and other market participants.

FRB facilities and programs established, or in the process of being established, include:
Paycheck Protection Program Liquidity Facility to provide financing related to Paycheck Protection Program loans made by banks;
Main Street New Loan Facility, a Main Street Priority Loan Facility, and a Main Street Expanded Loan Facility to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses;
Primary Dealer Credit Facility to provide liquidity to primary dealers through a secured lending facility;
Commercial Paper Funding Facility to purchase the commercial paper of certain U.S. issuers;
Primary Market Corporate Credit Facility to purchase corporate bonds directly from, or make loans directly to, eligible participants;
Secondary Market Corporate Credit Facility to purchase corporate bonds trading in secondary markets, including from exchange-traded funds, that were issued by eligible participants;
Term Asset-Backed Securities Loan Facility to make loans secured by asset-backed securities;
Municipal Liquidity Facility to purchase bonds directly from U.S. state, city and county issuers; and
Money Market Mutual Fund Liquidity Facility to purchase certain assets from, or make loans to, financial institutions providing financing to eligible money market mutual funds.

These facilities and programs are in various stages of development, and the Bancorp and the Bank currently, or may in the future participate in some of them, including as an agent or intermediary on behalf of clients or customers or in an advisory capacity. For commercial and consumer customers, Fifth Third has provided a host of relief options, including loan covenant relief, loan maturity extensions, payment deferrals, forbearances and fee waivers.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Paycheck Protection Program
As previously discussed, the Bancorp is participating in the SBA’s Paycheck Protection Program which was created by the CARES Act on March 27, 2020. As of September 30, 2020, the Bancorp held approximately 40,000 loans with a carrying amount of $5.2 billion under the program.

For further discussion on Fifth Third’s hardship relief programs as a result of the COVID-19 pandemic, refer to the Credit Risk Management subsection of the Risk Management section of MD&A and Note 4 and Note 7 of the Notes to Condensed Consolidated Financial Statements.

Senior Notes Offering
On January 31, 2020, the Bank issued and sold, under its bank notes program, $1.25 billion in aggregate principal amount of senior fixed-rate notes. The bank notes consisted of $650 million of 1.80% senior fixed-rate notes, with a maturity of three years, due on January 30, 2023; and $600 million of 2.25% senior fixed-rate notes, with a maturity of seven years, due on February 1, 2027.

On May 5, 2020, the Bancorp issued and sold $1.25 billion in aggregate principal amount of senior fixed-rate notes. The notes consisted of $500 million of 1.625% senior fixed-rate notes, with a maturity of three years, due on May 5, 2023; and $750 million of 2.55% senior fixed-rate notes, with a maturity of seven years, due on May 5, 2027.

For more information on the senior notes offerings, including disclosure on the redemption options, refer to Note 17 of the Notes to Condensed Consolidated Financial Statements.

Preferred Stock Offering
On July 30, 2020, the Bancorp issued in a registered public offering 350,000 depositary shares, representing 14,000 shares of 4.50% fixed-rate reset non-cumulative perpetual preferred stock, Series L, for net proceeds of approximately $346 million. Each preferred share has a $25,000 liquidation preference.

For more information on the preferred stock offering, including disclosure on the redemption options, refer to Note 18 of the Notes to Condensed Consolidated Financial Statements.

LIBOR Transition
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that FCA will stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Since then, central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR. The Bancorp has substantial exposure to LIBOR-based products within its commercial lending, commercial deposits, business banking, consumer lending and capital markets lines of business as well as corporate treasury function. It is expected that a transition away from the widespread use of LIBOR to alternative reference rates will occur by the end of 2021. Although the full impact of such reforms and actions remains unclear, the Bancorp continues to prepare to transition from LIBOR to these alternative reference rates. In the United States, it is likely that LIBOR-priced transactions and products will transfer to the Secured Overnight Financing Rate (“SOFR”). There are risks inherent with the transition to any alternative rate such as SOFR as the rates may behave differently than LIBOR in reaction to monetary, market and economic events.

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

For a further discussion of the various risks the Bancorp faces in connection with the expected replacement of LIBOR on its operations, see “Risk Factors—Market Risks—The replacement of LIBOR could adversely affect Fifth Third’s revenue or expenses and the value of those assets or obligations.” in Item 1A. Risk Factors of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019.

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 key performance indicators used by management to make operating decisions and evaluate capital utilization:

CET1 Capital Ratio: CET1 capital divided by risk-weighted assets as defined by the Basel III standardized approach to risk-weighting of assets
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Return on Average Tangible Common Equity (non-GAAP): Tangible net income available to common shareholders divided by average tangible common equity
Efficiency Ratio: Noninterest expense divided by the sum of net interest income on an FTE basis (non-GAAP) 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
Return on Average Assets: Net income annualized divided by quarterly average assets

Earnings Summary
The Bancorp’s net income available to common shareholders for the third quarter of 2020 was $562 million, or $0.78 per diluted share, which was net of $19 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2019 was $530 million, or $0.71 per diluted share, which was net of $19 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2020 was $754 million, or $1.04 per diluted share, which was net of $69 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2019 was $1.7 billion, or $2.37 per diluted share, which was net of $60 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $1.2 billion for the three months ended September 30, 2020, a decrease of $73 million compared to the same period in the prior year. Net interest income was negatively impacted by decreases in yields on average interest-earning assets of 141 bps. The decreases in yields on average interest-earning assets were primarily driven by decreases in yields on total average loans and leases primarily as a result of decreases in yields on average commercial and industrial loans, average commercial mortgage loans, average commercial construction loans and average home equity rates of 131 bps, 174 bps, 221 bps and 161 bps, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year. The net interest income impact of lower yields on average interest-earning assets was partially offset by decreases in rates paid on average interest-bearing liabilities of 90 bps. The decreases in rates paid on average interest-bearing liabilities were primarily driven by decreases in rates paid on average interest checking deposits, average money market deposits and average long-term debt rates of 102 bps, 99 bps and 64 bps, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year. Net interest income also benefited from increases in average commercial and industrial loans and average indirect secured consumer loans of $2.7 billion and $1.9 billion, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year.

Net interest income on an FTE basis (non-GAAP) was $3.6 billion for the nine months ended September 30, 2020, an increase of $28 million compared to the same period in the prior year. Net interest income was positively impacted by decreases in the rates paid on average interest-bearing liabilities of 71 bps. The decreases in rates paid on average interest-bearing liabilities were primarily driven by decreases in rates paid on average interest checking deposits, average money market deposits and average long-term debt of 82 bps, 73 bps and 49 bps, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. Net interest income also benefited from increases in average commercial and industrial loans, average indirect secured consumer loans and average commercial mortgage loans of $5.1 billion, $2.1 billion and $1.5 billion, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. These positive impacts were partially offset by decreases in yields on average interest-earning assets of 101 bps. The decreases in yields on average interest-earning assets were primarily driven by decreases in yields on total average loans and leases primarily driven by decreases in yields on average commercial and industrial loans, average commercial mortgage loans, average commercial construction loans and average home equity rates of 104 bps, 128 bps, 173 bps and 130 bps, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. Net interest income was also negatively impacted by increases in average interest checking deposits and average money market deposits of $10.6 billion and $4.1 billion, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. Net interest margin on an FTE basis (non-GAAP) was 2.58% and 2.85% for the three and nine months ended September 30, 2020, respectively, compared to 3.32% for both the comparable periods in the prior year.

Effective January 1, 2020, the Bancorp adopted ASU 2016-13 which established a new approach for estimating credit losses on certain types of financial instruments. The Bancorp recognized an initial increase to the ACL of approximately $653 million upon adoption of ASU 2016-13 on January 1, 2020, which included $171 million from the non-PCD loan portfolio resulting from the MB Financial, Inc. acquisition. The benefit from credit losses was $15 million and the provision for credit losses was $1.1 billion for the three and nine months ended September 30, 2020, respectively, compared to the provision for credit losses of $134 million and $310 million during the same periods in the prior year. The decrease in provision expense for the three months ended September 30, 2020 compared to the same period in the prior year was primarily driven by factors which caused a decrease in the ACL from the second quarter of 2020 including improved economic forecasts, improved consumer credit quality and lower period-end loan and lease balances, partially offset by continued increases in commercial criticized assets and nonperforming loans. The increase in provision expense for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily due to an increase in the ACL reflecting deterioration in the macroeconomic environment as a result of the impact of the COVID-19 pandemic, continued pressure on energy prices and the resulting impact of this environment on commercial borrowers as reflected in increased levels of commercial criticized assets. The change in the provision for credit losses for both periods also reflected the impact of the change in methodology for estimating credit losses from the incurred loss methodology to the expected credit loss methodology beginning in the first quarter of 2020. Net losses charged off as a percent of average portfolio loans and
8


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
leases were 0.35% and 0.36% for the three months ended September 30, 2020 and 2019, respectively, and 0.41% and 0.32% for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.84% compared to 0.62% at December 31, 2019. 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 7 of the Notes to Condensed Consolidated Financial Statements.

Noninterest income decreased $18 million for the three months ended September 30, 2020 compared to the same period in the prior year, primarily due to decreases in other noninterest income, mortgage banking net revenue and leasing business revenue, partially offset by an increase in wealth and asset management revenue. Other noninterest income decreased $38 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a decrease in private equity investment income as well as increases in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and the net losses on disposition and impairment of bank premises and equipment. Mortgage banking net revenue decreased $19 million for the three months ended September 30, 2020 compared to the same period in the prior year, primarily due to a decrease in net mortgage servicing revenue. Leasing business revenue decreased $15 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreases in lease remarketing fees and operating lease income. Wealth and asset management revenue increased $8 million for the three months ended September 30, 2020 compared to the same period in the prior year, primarily driven by increases in private client service fees and broker income.

Noninterest income decreased $458 million for the nine months ended September 30, 2020 compared to the same period in the prior year, primarily due to a decrease in other noninterest income, partially offset by increases in mortgage banking net revenue, commercial banking revenue and wealth and asset management revenue. Other noninterest income decreased $637 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the gain on sale of Worldpay, Inc. shares recognized during the first quarter of 2019 as well as a decrease in private equity investment income and an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. Mortgage banking net revenue increased $81 million for the nine months ended September 30, 2020, compared to the same period in the prior year, primarily due to increases in origination fees and gains on loan sales partially offset by a decrease in net mortgage servicing revenue. Commercial banking revenue increased $54 million for the nine months ended September 30, 2020 compared to the same period in the prior year, primarily driven by increases in institutional sales and bridge fees partially offset by a decrease in loan syndication fees. Wealth and asset management revenue increased $29 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by increases in private client service fees, broker income and institutional fees.

Noninterest expense increased $2 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in compensation and benefits expense, partially offset by decreases in other noninterest expense, marketing expense and technology and communications expense. The Bancorp recognized an immaterial amount of merger-related expenses related to the MB Financial, Inc. acquisition for the three months ended September 30, 2020 compared to $28 million in the same period in the prior year. Compensation and benefits expense increased $53 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to the impact of strategic hiring, the impact of raising the Bancorp's minimum wage in the fourth quarter of 2019 and an increase in severance expense. Other noninterest expense decreased $20 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in travel expense and professional service fees, partially offset by an increase in FDIC insurance and other taxes. Marketing expense decreased $17 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to the impact of the COVID-19 pandemic, which resulted in a pause or slowdown in numerous marketing campaigns, including running less advertising as well as the suspension of cash bonus and other account acquisition programs. Technology and communications expense decreased $11 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreased integration and conversion costs related to the acquisition of MB Financial, Inc.

Noninterest expense decreased $17 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in technology and communications expense and marketing expense, partially offset by an increase in compensation and benefits expense. The Bancorp recognized $16 million of merger-related expenses related to the MB Financial, Inc. acquisition for the nine months ended September 30, 2020 compared to $213 million in the same period in the prior year. Technology and communications expense decreased $47 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreased integration and conversion costs related to the acquisition of MB Financial, Inc. Marketing expense decreased $43 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to the impact of the COVID-19 pandemic, which resulted in a pause or slowdown in numerous marketing campaigns, including running less advertising as well as the suspension of cash bonus and other account acquisition programs. Compensation and benefits expenses increased $68 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to the impact of strategic hiring and the impact of raising the Bancorp's minimum wage in the fourth quarter of 2019. Compensation and benefits expense for the nine months ended September 30, 2020 included $10 million of special payments to employees providing essential banking services through the COVID-19 pandemic.

9


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
For more information on net interest income, 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 September 30, 2020. As of September 30, 2020, the Bancorp’s capital ratios, as defined by the U.S. banking agencies, were:
CET1 capital ratio: 10.14%;
Tier I risk-based capital ratio: 11.64%;
Total risk-based capital ratio: 14.93%;
Tier I leverage ratio: 8.37%

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

The 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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Net interest income (U.S. GAAP) $ 1,170  1,242  3,600  3,569 
Add: FTE adjustment 3  10  13 
Net interest income on an FTE basis (1) $ 1,173  1,246  3,610  3,582 
Net interest income on an FTE basis (annualized) (2) 4,667  4,943  4,823  4,789 
Interest income (U.S. GAAP) $ 1,329  1,625  4,257  4,694 
Add: FTE adjustment 3  10  13 
Interest income on an FTE basis $ 1,332  1,629  4,267  4,707 
Interest income on an FTE basis (annualized) (3) 5,299  6,463  5,701  6,293 
Interest expense (annualized) (4) $ 633  1,520  878  1,504 
Noninterest income (5) 722  740  2,043  2,501 
Noninterest expense (6) 1,161  1,159  3,482  3,499 
Average interest-earning assets (7) 180,704  148,854  169,422  144,088 
Average interest-bearing liabilities (8) 123,626  107,633  119,132  103,742 
Ratios:
Net interest margin on an FTE basis (2) / (7) 2.58  % 3.32  2.85  3.32 
Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8)) 2.42  2.93  2.62  2.92 
Efficiency ratio on an FTE basis (6) / ((1) + (5)) 61.3  58.4  61.6  57.5 
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.

10


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
September 30,
For the nine months ended
September 30,

($ in millions)
2020 2019 2020 2019
Net income available to common shareholders (U.S. GAAP) $ 562  530  754  1,718 
Add: Intangible amortization, net of tax 9  11  29  24 
Tangible net income available to common shareholders $ 571  541  783  1,742 
Tangible net income available to common shareholders (annualized) (1) 2,272  2,146  1,046  2,329 
Average Bancorp’s shareholders’ equity (U.S. GAAP) $ 22,952  21,087  22,364  19,430 
Less: Average preferred stock (2,007) (1,445) (1,849) (1,369)
 Average goodwill (4,261) (4,286) (4,257) (3,762)
 Average intangible assets (164) (208) (178) (161)
Average tangible common equity (2) $ 16,520  15,148  16,080  14,138 
Return on average tangible common equity (1) / (2) 13.8  % 14.2  6.5  16.5 

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. The Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

The following table reconciles non-GAAP capital ratios to U.S. GAAP:
TABLE 4: Non-GAAP Financial Measures - Capital Ratios
As of ($ in millions) September 30,
2020
December 31,
2019
Total Bancorp Shareholders’ Equity (U.S. GAAP) $ 22,951  21,203 
Less: Preferred stock (2,116) (1,770)
Goodwill (4,261) (4,252)
Intangible assets (157) (201)
AOCI (2,831) (1,192)
Tangible common equity, excluding AOCI (1) 13,586  13,788 
Add: Preferred stock 2,116  1,770 
Tangible equity (2) $ 15,702  15,558 
Total Assets (U.S. GAAP) $ 201,996  169,369 
Less: Goodwill (4,261) (4,252)
Intangible assets (157) (201)
AOCI, before tax (3,584) (1,509)
Tangible assets, excluding AOCI (3) $ 193,994  163,407 
Ratios:
Tangible equity as a percentage of tangible assets (2) / (3) 8.09   % 9.52 
Tangible common equity as a percentage of tangible assets (1) / (3) 6.99  8.44 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
RECENT ACCOUNTING STANDARDS
Note 4 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, 2019. On January 1, 2020, the Bancorp adopted ASU 2016-13 (“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”) and its related subsequent amendments, along with ASU 2017-04 (“Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”). For additional information about these ASUs and their impacts on the Bancorp, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements. In conjunction with the adoption of these ASUs, the Bancorp has revised its Critical Accounting Policies for the ALLL, reserve for unfunded commitments and goodwill 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, 2019 for discussion on the critical accounting policies for the ALLL, reserve for unfunded commitments and goodwill for periods prior to January 1, 2020. There have been no other material changes to the valuation techniques or models during the nine months ended September 30, 2020.

ALLL
The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 7 of the Notes to 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 adjusted for expected extensions, renewals or modifications except in circumstances where the Bancorp reasonably expects to execute a TDR with the borrower or where certain extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bancorp. Accrued interest receivables on loans are presented in other assets in the Condensed Consolidated Balance Sheets. 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 an allowance for credit losses for accrued interest receivables. For additional information on the Bancorp’s accounting policies related to nonaccrual 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, 2019.

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.

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 that exhibit observed credit weaknesses, as well as loans that have been modified in a TDR, 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 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
12


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
evaluation of legal options available to the Bancorp. Allowances for individually evaluated loans and leases that are collateral-dependent are typically measured based on the fair value of the underlying collateral, less expected costs to sell. Individually evaluated loans and leases that are not collateral-dependent are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual. Specific allowances on individually evaluated commercial loans and leases, including TDRs, 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. These include commercial loans and leases that do not meet the criteria for individual evaluation as well as homogeneous loans in the residential mortgage and consumer portfolio segments. 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 grades, 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 ratably 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 grades 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.

Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities and is included in other liabilities in the Condensed Consolidated Balance Sheets. The determination of the adequacy of the reserve is based upon expected credit losses over the remaining contractual life of the commitments, taking into consideration the current funded balance and estimated exposure over the reasonable and supportable forecast period. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorp’s ALLL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in provision for credit losses in the Condensed Consolidated Statements of Income.

Goodwill
Business combinations entered into by the Bancorp typically include the recognition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorp’s reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Bancorp evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Bancorp, the performance of the Bancorp’s common stock, the key financial performance metrics of the Bancorp’s reporting units and events affecting the reporting units to determine if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Bancorp performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Bancorp’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorp’s stock price. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. The Bancorp employs an income-based approach, utilizing the reporting unit’s forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting unit’s estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of each reporting unit’s forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations and actual results may differ from forecasted results. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorp’s stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorp’s reporting units in order to corroborate the results of the income approach. The Bancorp completed its annual goodwill impairment test as of September 30, 2020 and concluded that the fair values of each of its reporting units exceeded their respective carrying amounts. While the Bancorp concluded that its goodwill was not impaired as of September 30, 2020, further deterioration in economic conditions could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Bancorp’s results of operations in the period such charges are recognized. Refer to Note 11 of the Notes to Condensed Consolidated Financial Statements for further information regarding the Bancorp’s goodwill.
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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 (includes transaction deposits and other time deposits) and wholesale funding (includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.

Tables 5 and 6 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 2020 and 2019, 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 $1.2 billion for the three months ended September 30, 2020, a decrease of $73 million compared to the same period in the prior year. Net interest income was negatively impacted by decreases in yields on average interest-earning assets of 141 bps. The decreases in yields on average interest-earning assets were primarily driven by decreases in yields on total average loans and leases primarily as a result of decreases in yields on average commercial and industrial loans, average commercial mortgage loans, average commercial construction loans and average home equity rates of 131 bps, 174 bps, 221 bps and 161 bps, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year. The decrease in yields on total average loans and leases for the three months ended September 30, 2020 was primarily due to a decrease in market rates, impacting the Bancorp’s portfolios of floating interest rate loans, which are primarily LIBOR- and Prime-based. The Bancorp’s portfolios of fixed interest rate loans also decreased in yield as a result of increased refinance activity and lower reinvestment yields due to lower overall market rates. The net interest income impact of lower yields on average interest-earning assets was partially offset by decreases in rates paid on average interest-bearing liabilities of 90 bps. The decreases in rates paid on average interest-bearing liabilities were primarily driven by decreases in rates paid on average interest checking deposits, average money market deposits and average long-term debt rates of 102 bps, 99 bps and 64 bps, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year. Net interest income also benefited from increases in average commercial and industrial loans and average indirect secured consumer loans of $2.7 billion and $1.9 billion, respectively, for the three months ended September 30, 2020 compared to the same period in the prior year.

Net interest income on an FTE basis (non-GAAP) was $3.6 billion for the nine months ended September 30, 2020, an increase of $28 million compared to the same period in the prior year. Net interest income was positively impacted by decreases in the rates paid on average interest-bearing liabilities of 71 bps. The decreases in rates paid on average interest-bearing liabilities were primarily driven by decreases in rates paid on average interest checking deposits, average money market deposits and average long-term debt of 82 bps, 73 bps and 49 bps, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. Net interest income also benefited from increases in average commercial and industrial loans, average indirect secured consumer loans and average commercial mortgage loans of $5.1 billion, $2.1 billion and $1.5 billion, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. These positive impacts were partially offset by decreases in yields on average interest-earning assets of 101 bps. The decreases in yields on average interest-earning assets were primarily driven by decreases in yields on total average loans and leases primarily driven by decreases in yields on average commercial and industrial loans, average commercial mortgage loans, average commercial construction loans and average home equity rates of 104 bps, 128 bps, 173 bps and 130 bps, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year. Net interest income was also negatively impacted by increases in average interest checking deposits and average money market deposits of $10.6 billion and $4.1 billion, respectively, for the nine months ended September 30, 2020 compared to the same period in the prior year.

Net interest income for both the three and nine months ended September 30, 2020 compared to the same periods in the prior year was adversely impacted by the March 2020, October 2019, September 2019 and August 2019 decisions of the FOMC to lower the target range of the federal funds rate. During the three and nine months ended September 30, 2020, net interest income included $13 million and $44 million, respectively, of amortization and accretion of premiums and discounts on acquired loans and leases and assumed deposits and long-term debt from acquisitions compared to $28 million and $47 million for the three and nine months ended September 30, 2019, respectively.

Net interest rate spread on an FTE basis (non-GAAP) was 2.42% and 2.62% during the three and nine months ended September 30, 2020, respectively, compared to 2.93% and 2.92% in the same periods in the prior year. Yields on average interest-earning assets decreased 141 bps and 101 bps, respectively, for the three and nine months ended September 30, 2020, partially offset by decreases in the rates paid on average interest-bearing liabilities of 90 bps and 71 bps, respectively, for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019.

15


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net interest margin on an FTE basis (non-GAAP) was 2.58% and 2.85% for the three and nine months ended September 30, 2020, respectively, compared to 3.32% for both the comparable periods in the prior year. Net interest margin was negatively impacted by increases in average interest-earning assets of $31.9 billion and $25.3 billion for the three and nine months ended September 30, 2020, respectively, which was primarily attributable to growth in low yielding cash balances reported in other short-term investments. These negative impacts were partially offset by increases in average free funding balances primarily driven by increases in average demand deposits of $15.2 billion and $10.1 billion, respectively, and average shareholders’ equity of $1.7 billion and $2.8 billion, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in the prior year. Net interest margin results are expected to remain suppressed as a result of increased liquidity levels in the form of excess cash balances which are expected to remain at elevated levels driven by the amount of fiscal stimulus that has increased the banking industry’s balance sheets, including the Bancorp’s.

Interest income on an FTE basis (non-GAAP) from loans and leases decreased $274 million and $406 million during the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 driven by the previously mentioned decreases in yields on average loans and leases, partially offset by increases in average commercial and industrial loans, average indirect secured consumer loans and average commercial mortgage loans for the three and nine months ended September 30, 2020 compared to the same periods in the prior year. 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 decreased $23 million and $34 million during the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily due to decreases in yields on average other short-term investments and average taxable securities, partially offset by increases in average balances.

Interest expense on core deposits decreased $181 million and $361 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily due to decreases in the cost of average interest-bearing core deposits to 13 bps and 35 bps for the three and nine months ended September 30, 2020, respectively, from 101 bps for both the three and nine months ended September 30, 2019. The decreases in the cost of average interest-bearing core deposits were primarily due to the previously mentioned decreases in the rates paid on average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding decreased $43 million and $107 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily due to the previously mentioned decreases in rates paid on average long-term debt as well as decreases in rates paid on average other short-term borrowings and average certificates $100,000 and over. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During the three and nine months ended September 30, 2020, average wholesale funding represented 18% and 19%, respectively, of average interest-bearing liabilities, compared to 21% and 22% for the three and nine months ended September 30, 2019, 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.

16


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 5: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the three months ended September 30, 2020 September 30, 2019
Attribution of Change in
Net Interest Income(a)
($ in millions) Average Balance Revenue/
Cost
Average Yield/ Rate Average Balance Revenue/
Cost
Average Yield/ Rate Volume Yield/ Rate Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans $ 54,056  455  3.35  % $ 51,364  604  4.66  % $ 28  (177) (149)
Commercial mortgage loans 11,071  87  3.12  10,695  131  4.86  (48) (44)
Commercial construction loans 5,534  44  3.18  5,267  71  5.39  (31) (27)
Commercial leases 2,966  26  3.44  3,563  30  3.34  (5) (4)
Total commercial loans and leases 73,627  612  3.30  70,889  836  4.68  31  (255) (224)
Residential mortgage loans 17,814  156  3.48  17,733  164  3.67  (9) (8)
Home equity 5,581  50  3.59  6,267  82  5.20  (9) (23) (32)
Indirect secured consumer loans 12,599  125  3.93  10,707  114  4.22  19  (8) 11 
Credit card 2,134  61  11.37  2,448  77  12.57  (9) (7) (16)
Other consumer loans 2,858  46  6.46  2,622  51  7.69  (9) (5)
Total consumer loans 40,986  438  4.25  39,777  488  4.87  (56) (50)
Total loans and leases $ 114,613  1,050  3.64  % $ 110,666  1,324  4.75  % $ 37  (311) (274)
Securities:
Taxable 36,147  273  3.01  35,653  291  3.24  (21) (18)
Exempt from income taxes(b)
153  1  2.99  38  —  3.18  — 
Other short-term investments 29,791  8  0.10  2,497  14  2.18  18  (24) (6)
Total interest-earning assets $ 180,704  1,332  2.93  % $ 148,854  1,629  4.34  % $ 59  (356) (297)
Cash and due from banks 2,944  2,769 
Other assets 21,583  19,077 
Allowance for loan and lease losses (2,698) (1,115)
Total assets
$ 202,533  $ 169,585 
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits $ 49,800  13  0.10  % $ 37,729  106  1.12  % $ 26  (119) (93)
Savings deposits 17,013  2  0.04  14,405  0.18  (6) (5)
Money market deposits 31,151  11  0.14  26,962  77  1.13  10  (76) (66)
Foreign office deposits 189    0.06  222  —  0.37  —  —  — 
Other time deposits 3,711  9  0.95  5,823  26  1.79  (7) (10) (17)
Total interest-bearing core deposits 101,864  35  0.13  85,141  216  1.01  30  (211) (181)
Certificates $100,000 and over 3,633  11  1.26  4,795  27  2.20  (6) (10) (16)
Other deposits       47  —  1.97  —  —  — 
Federal funds purchased 273    0.20  739  2.06  (2) (2) (4)
Other short-term borrowings 1,626  5  1.28  1,278  2.55  (5) (3)
Long-term debt 16,230  108  2.62  15,633  128  3.26  (26) (20)
Total interest-bearing liabilities $ 123,626  159  0.51  % $ 107,633  383  1.41  % $ 30  (254) (224)
Demand deposits 50,414  35,223 
Other liabilities 5,541  5,522 
Total liabilities $ 179,581  $ 148,378 
Total equity $ 22,952  $ 21,207 
Total liabilities and equity $ 202,533  $ 169,585 
Net interest income (FTE)(c)
$ 1,173  $ 1,246  $ 29  (102) (73)
Net interest margin (FTE)(c)
2.58  % 3.32  %
Net interest rate spread (FTE)(c)
2.42  2.93 
Interest-bearing liabilities to
interest-earning assets
68.41  72.31 
(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 $3 and $4 for the three months ended September 30, 2020 and 2019, 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.
17


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 6: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the nine months ended
September 30, 2020 September 30, 2019
Attribution of Change in
Net Interest Income(a)
($ in millions) Average Balance Revenue/
Cost
Average Yield/ Rate Average Balance Revenue/
Cost
Average Yield/ Rate Volume Yield/ Rate Total
Assets:
Interest-earning assets:
Loans and leases:(b)
Commercial and industrial loans $ 54,948  1,511  3.67  % $ 49,895  1,757  4.71  % $ 168  (414) (246)
Commercial mortgage loans 11,105  305  3.66  9,593  354  4.94  51  (100) (49)
Commercial construction loans 5,405  154  3.82  5,119  213  5.55  11  (70) (59)
Commercial leases 3,074  79  3.46  3,643  90  3.31  (15) (11)
Total commercial loans and leases 74,532  2,049  3.67  68,250  2,414  4.73  215  (580) (365)
Residential mortgage loans 17,748  471  3.55  17,163  474  3.69  16  (19) (3)
Home equity 5,802  173  3.98  6,333  250  5.28  (19) (58) (77)
Indirect secured consumer loans 12,179  367  4.02  10,030  304  4.05  65  (2) 63 
Credit card 2,293  199  11.61  2,418  227  12.52  (12) (16) (28)
Other consumer loans 2,847  147  6.88  2,525  143  7.59  18  (14)
Total consumer loans 40,869  1,357  4.43  38,469  1,398  4.86  68  (109) (41)
Total loans and leases $ 115,401  3,406  3.94  % $ 106,719  3,812  4.78  % $ 283  (689) (406)
Securities:
Taxable 36,312  837  3.08  35,151  861  3.28  29  (53) (24)
Exempt from income taxes(b)
157  4  3.00  35  3.72  — 
Other short-term investments 17,552  20  0.15  2,183  33  1.99  42  (55) (13)
Total interest-earning assets $ 169,422  4,267  3.36  % $ 144,088  4,707  4.37  % $ 357  (797) (440)
Cash and due from banks 2,981  2,641 
Other assets 20,870  16,501 
Allowance for loan and lease losses (2,300) (1,111)
Total assets
$ 190,973  $ 162,119 
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits $ 46,631  117  0.33  % $ 35,995  310  1.15  % $ 74  (267) (193)
Savings deposits 16,031  9  0.07  13,963  17  0.17  (11) (8)
Money market deposits 29,434  83  0.38  25,357  210  1.11  29  (156) (127)
Foreign office deposits 193    0.25  198  0.49  —  (1) (1)
Other time deposits 4,402  42  1.27  5,457  74  1.81  (13) (19) (32)
Total interest-bearing core deposits 96,691  251  0.35  80,970  612  1.01  93  (454) (361)
Certificates $100,000 and over 3,685  43  1.56  4,650  75  2.14  (14) (18) (32)
Other deposits 95  1  0.76  269  2.43  (2) (2) (4)
Federal funds purchased 412  2  0.68  1,298  23  2.42  (10) (11) (21)
Other short-term borrowings 1,916  13  0.90  1,017  23  2.97  12  (22) (10)
Long-term debt 16,333  347  2.84  15,538  387  3.33  19  (59) (40)
Total interest-bearing liabilities $ 119,132  657  0.74  % $ 103,742  1,125  1.45  % $ 98  (566) (468)
Demand deposits 44,004  33,883 
Other liabilities 5,473  4,950 
Total liabilities $ 168,609  $ 142,575 
Total equity $ 22,364  $ 19,544 
Total liabilities and equity $ 190,973  $ 162,119 
Net interest income (FTE)(c)
$ 3,610  $ 3,582  $ 259  (231) 28 
Net interest margin (FTE)(c)
2.85  % 3.32  %
Net interest rate spread (FTE)(c)
2.62  2.92 
Interest-bearing liabilities to
interest-earning assets
70.32  72.00 
(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 $10 and $13 for the nine months ended September 30, 2020 and 2019, 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.

18


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 and the portfolio of unfunded loan commitments and letters of credit that is based on factors discussed in the Critical Accounting Policies section of this Quarterly Report on Form 10-Q. 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 benefit from credit losses was $15 million and the provision for credit losses was $1.1 billion for the three and nine months ended September 30, 2020, respectively, compared to the provision for credit losses of $134 million and $310 million during the same periods in the prior year. The decrease in provision expense for the three months ended September 30, 2020 compared to the same period in the prior year was primarily driven by factors which caused a decrease in the ACL from the second quarter of 2020 including improved economic forecasts, improved consumer credit quality and lower period-end loan and lease balances, partially offset by continued increases in commercial criticized assets and nonperforming loans. The increase in provision expense for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily due to an increase in the ACL reflecting deterioration in the macroeconomic environment as a result of the impact of the COVID-19 pandemic, continued pressure on energy prices and the resulting impact of this environment on commercial borrowers as reflected in increased levels of commercial criticized assets. The change in the provision for credit losses for both periods also reflected the impact of the change in methodology for estimating credit losses from the incurred loss methodology to the expected credit loss methodology beginning in the first quarter of 2020.

The ALLL increased $1.4 billion from December 31, 2019 to $2.6 billion at September 30, 2020. At September 30, 2020, the ALLL as a percent of portfolio loans and leases increased to 2.32%, compared to 1.10% at December 31, 2019. The reserve for unfunded commitments increased $38 million from December 31, 2019 to $182 million at September 30, 2020. The ACL as a percent of portfolio loans and leases increased to 2.49% at September 30, 2020, compared to 1.23% at December 31, 2019. These increases reflect the adoption of ASU 2016-13, which resulted in a combined increase to the ALLL and reserve for unfunded commitments of approximately $653 million, as well as the previously mentioned items impacting the provision for (benefit from) credit losses.

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

Noninterest Income
Noninterest income decreased $18 million and $458 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.

The following table presents the components of noninterest income:
TABLE 7: Components of Noninterest Income
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Service charges on deposits $ 144  143  1 $ 414  417  (1)
Wealth and asset management revenue 132  124  6 387  358  8
Commercial banking revenue 125  123  2 387  333  16
Mortgage banking net revenue 76  95  (20) 295  214  38
Card and processing revenue 92  94  (2) 260  266  (2)
Leasing business revenue 77  92  (16) 207  199  4
Other noninterest income 26  64  (59) 42  679  (94)
Securities gains, net 51  920 48  30  60
Securities gains (losses), net non-qualifying hedges on mortgage servicing rights
(1) —  NM 3  (40)
Total noninterest income $ 722  740  (2) $ 2,043  2,501  (18)

Service charges on deposits
Service charges on deposits increased $1 million and decreased $3 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. The increase for the three months ended September 30, 2020 compared to the same period in the prior year was driven by an increase in commercial deposit fees of $9 million partially offset by a decrease in consumer deposit fees of $8 million. The decrease for the nine months ended September 30, 2020 compared to the same period in
19


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
the prior year was due to a decrease of $24 million in consumer deposit fees partially offset by an increase of $21 million in commercial deposit fees.

Wealth and asset management revenue
Wealth and asset management revenue increased $8 million and $29 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily driven by increases in private client service fees of $5 million and $13 million, respectively, and broker income of $4 million and $12 million, respectively. The increase for the nine months ended September 30, 2020 also included the impact of an increase in institutional fees of $5 million compared to the same period in the prior year. The Bancorp’s trust and registered investment advisory businesses had approximately $422 billion and $397 billion in total assets under care as of September 30, 2020 and 2019, respectively, and managed $53 billion and $46 billion in assets for individuals, corporations and not-for-profit organizations as of September 30, 2020 and 2019, respectively.

Commercial banking revenue
Commercial banking revenue increased $2 million and $54 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. The increase for the three months ended September 30, 2020 compared to the same period in the prior year was primarily due to an increase in institutional sales of $16 million partially offset by decreases in contract revenue from commercial customer derivatives and loan syndication fees of $7 million and $6 million, respectively. The increase for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily driven by increases in institutional sales and bridge fees of $58 million and $9 million, respectively, partially offset by a decrease in loan syndication fees of $19 million.

Mortgage banking net revenue
Mortgage banking net revenue decreased $19 million and increased $81 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.

The following table presents the components of mortgage banking net revenue:
TABLE 8: Components of Mortgage Banking Net Revenue
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Origination fees and gains on loan sales $ 93  64  269  126 
Net mortgage servicing revenue:
Gross mortgage servicing fees 66  71  197  196 
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs
(83) (40) (171) (108)
Net mortgage servicing revenue (17) 31  26  88 
Total mortgage banking net revenue $ 76  95  295  214 

Origination fees and gains on loan sales increased $29 million and $143 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily driven by an increase in originations and gain on sale margins due to the lower interest rate environment. Residential mortgage loan originations increased to $4.5 billion and $12.0 billion for the three and nine months ended September 30, 2020, respectively, from $3.4 billion and $7.9 billion for the three and nine months ended September 30, 2019, respectively.

Net mortgage servicing revenue decreased $48 million and $62 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019 primarily due to increases in net negative valuation adjustments of $43 million and $63 million, respectively. The decrease for the three months ended September 30, 2020 compared to the same period in the prior year also included the impact of a decrease in gross mortgage servicing fees of $5 million. Refer to Table 9 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy.
20


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 9: Components of Net Valuation Adjustments on MSRs
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio
$ (12) 130 348 308
Changes in fair value:
Due to changes in inputs or assumptions 4 (120) (340) (294)
Other changes in fair value (75) (50) (179) (122)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs
$ (83) (40) (171) (108)

Mortgage rates decreased during both the three and nine months ended September 30, 2020 and 2019, which caused modeled prepayment speeds to rise. Additionally, swap rates increased for the three months ended September 30, 2020, which caused modeled OAS assumptions to increase. The fair value of the MSR portfolio increased $4 million and decreased $340 million for the three and nine months ended September 30, 2020, respectively, compared to decreases of $120 million and $294 million for the three and nine months ended September 30, 2019, respectively, due to changes to inputs to the valuation model, including prepayment speeds and OAS assumptions. The fair value of the MSR portfolio decreased $75 million and $179 million for the three and nine months ended September 30, 2020, respectively, compared to $50 million and $122 million for the three and nine months ended September 30, 2019, respectively, due to the impact of contractual principal payments and actual prepayment activity.

Further detail on the valuation of MSRs can be found in Note 14 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 15 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. The Bancorp recognized net losses of $1 million and net gains of $3 million during the three and nine months ended September 30, 2020, respectively, compared to net losses of an immaterial amount and net gains of $5 million during the three and nine months ended September 30, 2019, respectively, recorded in securities gains (losses), net – non-qualifying hedges on MSRs in the Bancorp’s Condensed Consolidated Statements of Income.

The Bancorp’s total residential mortgage loans serviced as of September 30, 2020 and 2019 were $91.4 billion and $100.5 billion, respectively, with $73.5 billion and $82.7 billion, respectively, of residential mortgage loans serviced for others.

Card and processing revenue
Card and processing revenue decreased $2 million and $6 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. The decrease for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily driven by a decrease in customer spend volume, partially offset by lower reward costs and increases in other EFT income driven by the MB Financial, Inc. acquisition at the end of the first quarter of 2019.

Leasing business revenue
Leasing business revenue decreased $15 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreases in lease remarketing fees and operating lease income of $10 million and $5 million, respectively. Leasing business revenue increased $8 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by increases in lease syndication fees and operating lease income of $9 million and $7 million, respectively, partially offset by a decrease in lease remarketing fees of $6 million. The increase in operating lease income for the nine months ended September 30, 2020 was driven by the acquisition of MB Financial, Inc. at the end of the first quarter of 2019.

21


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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
BOLI income $ 15  15  47  44 
Cardholder fees 12  14  33  44 
Consumer loan and lease fees 5  15  17 
Insurance income 5  15  14 
Banking center income 5  15  17 
Loss on swap associated with the sale of Visa, Inc. Class B Shares (22) (11) (73) (63)
Net losses on disposition and impairment of bank premises and equipment (11) (3) (26) (24)
Private equity investment (loss) income 3  21  (5) 43 
Gain on sale of Worldpay, Inc. shares       562 
Equity method income from interest in Worldpay Holding, LLC      
Other, net 14  12  21  23 
Total other noninterest income $ 26  64  42  679 

Other noninterest income decreased $38 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a decrease in private equity investment income as well as increases in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and the net losses on disposition and impairment of bank premises and equipment.

Private equity investment income decreased $18 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by the recognition of gains on certain private equity investments during the three months ended September 30, 2019. For additional information on the valuation of private equity investments, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements. The Bancorp recognized negative valuation adjustments of $22 million related to the Visa total return swap during the three months ended September 30, 2020 compared to negative valuation adjustments of $11 million during the three months ended September 30, 2019. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements. Net losses on disposition and impairment of bank premises and equipment increased $8 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily driven by the impact of losses on the disposition of certain long-lived assets as well as impairment charges. For additional information on impairment of bank premises and equipment, refer to Note 8 and Note 24 of the Notes to Condensed Consolidated Financial Statements.

Other noninterest income decreased $637 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the gain on sale of Worldpay, Inc. shares recognized during the first quarter of 2019 as well as a decrease in private equity investment income and an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares.

The Bancorp recognized a $562 million gain related to the sale of Worldpay, Inc. shares during the first quarter of 2019. Private equity investment income decreased $48 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by negative net valuation adjustments and impairment charges recognized on certain private equity investments during the nine months ended September 30, 2020 compared to positive net valuation adjustments and gains on certain private equity investments during the nine months ended September 30, 2019. For additional information on the valuation of private equity investments, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements. The Bancorp recognized negative valuation adjustments of $73 million related to the Visa total return swap during the nine months ended September 30, 2020 compared to negative valuation adjustments of $63 million during the nine months ended September 30, 2019. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 24 of the Notes to Condensed Consolidated Financial Statements.

22


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest Expense
Noninterest expense increased $2 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in compensation and benefits expense, partially offset by decreases in other noninterest expense, marketing expense and technology and communications expense. Noninterest expense decreased $17 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in technology and communications expense and marketing expense, partially offset by an increase in compensation and benefits expense.

The following table presents the components of noninterest expense:
TABLE 11: Components of Noninterest Expense
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Compensation and benefits $ 637  584  9 $ 1,911  1,843  4
Technology and communications 89  100  (11) 272  319  (15)
Net occupancy expense 90  84  7 254  248  2
Leasing business expense 35  40  (13) 103  97  6
Equipment expense 33  33  97  96  1
Card and processing expense 29  33  (12) 89  98  (9)
Marketing expense 23  40  (43) 74  117  (37)
Other noninterest expense 225  245  (8) 682  681 
Total noninterest expense $ 1,161  1,159  $ 3,482  3,499 
Efficiency ratio on an FTE basis(a)
61.3  % 58.4  61.6  % 57.5 
(a)This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

The Bancorp recognized an immaterial amount and $28 million of merger-related expenses for the three months ended September 30, 2020 and 2019, respectively, and $16 million and $213 million for the nine months ended September 30, 2020 and 2019, respectively. The following table provides a summary of merger-related expenses recorded in noninterest expense:
TABLE 12: Merger-Related Expenses
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Compensation and benefits $   14  4 88
Technology and communications   6 68
Net occupancy expense   4 10
Equipment expense   —    1
Card and processing expense   —    1
Marketing expense   —    7
Other noninterest expense   2 38
Total $   28  16 213

Technology and communications expense decreased $11 million and $47 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreased integration and conversion costs related to the acquisition of MB Financial, Inc.

Marketing expense decreased $17 million and $43 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to the impact of the COVID-19 pandemic, which resulted in a pause or slowdown in numerous marketing campaigns, including running less advertising as well as the suspension of cash bonus and other account acquisition programs.

Compensation and benefits expense increased $53 million and $68 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to strategic hiring and the impact of raising the Bancorp's minimum wage in the fourth quarter of 2019. The increase for the three months ended September 30, 2020 also included an increase in severance expense of $18 million. Compensation and benefits expense for the three and nine months ended September 30, 2020 included zero and $10 million, respectively, of special payments to employees providing essential banking services through the COVID-19 pandemic. Full-time equivalent employees totaled 20,283 at September 30, 2020 compared to 19,478 at September 30, 2019.

23


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the components of other noninterest expense:
TABLE 13: Components of Other Noninterest Expense
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Loan and lease $ 41  40  116  101 
Losses and adjustments 23  25  94  81 
FDIC insurance and other taxes 36  22  86  60 
Data processing 20  19  55  53 
Intangible amortization 12  14  36  31 
Professional service fees 10  17  33  53 
Postal and courier 9  27  28 
Travel 4  18  23  51 
Recruitment and education 5  16  19 
Insurance 4  11  10 
Supplies 3  10  11 
Donations 2  9 
Other, net 56  62  166  174 
Total other noninterest expense $ 225  245  682  681 

Other noninterest expense decreased $20 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in travel expense and professional service fees, partially offset by an increase in FDIC insurance and other taxes. Travel expense decreased $14 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to reduced business travel as a direct result of the COVID-19 pandemic. Professional service fees decreased $7 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in consulting fees and acquisition costs. FDIC insurance and other taxes increased $14 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in the assessment base.

Other noninterest expense increased $1 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to increases in FDIC insurance and other taxes, loan and lease expense and losses and adjustments, partially offset by decreases in travel expenses and professional service fees. FDIC insurance and other taxes increased $26 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in the assessment base. Loan and lease expense increased $15 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in loan closing expenses. Losses and adjustments increased $13 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in credit valuation adjustments incurred during the first quarter of 2020 on derivatives associated with customer accommodation contracts, partially offset by a reduction in legal settlements expense. Travel expenses decreased $28 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to business travel being suspended for the second quarter of 2020 and reduced travel in the third quarter of 2020 as a direct result of the COVID-19 pandemic. Professional service fees decreased $20 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in consulting fees and acquisition costs. Additionally, other noninterest expense included $6 million of debt extinguishment costs associated with FHLB advances extinguished during the nine months ended September 30, 2020.

Applicable Income Taxes
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 14: Applicable Income Taxes
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income before income taxes $ 746  689  1,051  2,261 
Applicable income tax expense 165  140  228  483 
Effective tax rate 22.1   % 20.2  21.6  21.4 

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 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
24


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.

The increase in the effective tax rate for the three months ended September 30, 2020 compared to the same period in the prior year was primarily related to the amount of income tax benefit recognized related to gains on sales of leases that are exempt from federal taxation for the three months ended September 30, 2019 as well as an increase in estimated state income tax expense and an increase in non-deductible expenses for the three months ended September 30, 2020.

For stock-based awards, U.S. GAAP requires the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. The Bancorp cannot predict its stock price or whether and when its employees will exercise stock-based awards in the future. Based on its stock price at September 30, 2020, the Bancorp estimates it may be necessary to recognize $5 million of additional income tax expense over the next twelve months related to the settlement of stock-based awards primarily in the first half of 2021. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorp’s stock price and the number of SARs exercised by employees.

25


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 15 summarizes end of period loans and leases, including loans and leases held for sale and Table 16 summarizes average total loans and leases, including average loans and leases held for sale.    
TABLE 15: Components of Total Loans and Leases (including loans and leases held for sale)
September 30, 2020 December 31, 2019
As of ($ in millions) Carrying Value % of Total Carrying Value % of Total
Commercial loans and leases:
Commercial and industrial loans(a)
$ 51,752  46  % $ 50,677  46   %
Commercial mortgage loans 10,880  9  10,964  10 
Commercial construction loans 5,656  5  5,090 
Commercial leases 3,021  3  3,363 
Total commercial loans and leases 71,309  63  70,094  63 
Consumer loans:
Residential mortgage loans(b)
18,422  16  17,988  16 
Home equity 5,455  5  6,083 
Indirect secured consumer loans 12,925  11  11,538  10 
Credit card 2,087  2  2,532 
Other consumer loans 2,856  3  2,723 
Total consumer loans 41,745  37  40,864  37 
Total loans and leases $ 113,054  100   % $ 110,958  100   %
Total portfolio loans and leases (excluding loans and leases held for sale)
$ 110,731  $ 109,558 
(a)Includes $5.2 billion, as of September 30, 2020, related to the SBA’s Paycheck Protection Program established under the CARES Act on March 27, 2020.
(b)Includes $51 million, as of September 30, 2020, of residential mortgage loans previously sold to GNMA for which the Bancorp is deemed to have regained effective control over under ASC Topic 860, but did not exercise its option to repurchase. Refer to Note 16 of the Notes to Condensed Consolidated Financial Statements for further information.

Total loans and leases, including loans and leases held for sale, increased $2.1 billion, or 2%, from December 31, 2019. The increase from December 31, 2019 was the result of a $1.2 billion, or 2%, increase in commercial loans and leases as well as an $881 million, or 2%, increase in consumer loans.

Commercial loans and leases increased $1.2 billion from December 31, 2019 due to increases in commercial and industrial loans and commercial construction loans, partially offset by decreases in commercial leases and commercial mortgage loans. Commercial and industrial loans increased $1.1 billion, or 2%, from December 31, 2019 primarily as a result of PPP loans originated during the second and third quarters of 2020. Commercial construction loans increased $566 million, or 11% from December 31, 2019 primarily as a result of increased line of credit utilization as well as lower levels of payoffs. Commercial leases decreased $342 million, or 10% from December 31, 2019 primarily as a result of a planned reduction in indirect non-relationship-based lease originations. Commercial mortgage loans decreased $84 million, or 1%, from December 31, 2019 as payoffs exceeded loan originations.

Consumer loans increased $881 million from December 31, 2019 due to increases in indirect secured consumer loans, residential mortgage loans and other consumer loans, partially offset by decreases in home equity and credit card. Indirect secured consumer loans increased $1.4 billion, or 12%, from December 31, 2019 primarily as a result of loan production exceeding payoffs. Residential mortgage loans increased $434 million, or 2%, from December 31, 2019 primarily due to the repurchase of certain loans from GNMA that were in forbearance programs, partially offset by higher runoff due to payoffs exceeding loan originations. Other consumer loans increased $133 million, or 5%, from December 31, 2019 primarily as a result of increases in loan originations. Home equity decreased $628 million, or 10%, from December 31, 2019 as payoffs exceeded loan originations. Credit card decreased $445 million, or 18%, from December 31, 2019 primarily due to negative economic impacts from the COVID-19 pandemic, including reductions in the number of active accounts as well as purchase and balance activity per active account.
26


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 16: Components of Average Loans and Leases (including average loans and leases held for sale)
September 30, 2020 September 30, 2019
For the three months ended ($ in millions) Carrying Value % of Total Carrying Value % of Total
Commercial loans and leases:
Commercial and industrial loans $ 54,056  47   % $ 51,364  46   %
Commercial mortgage loans 11,071  10  10,695  10 
Commercial construction loans 5,534  5  5,267 
Commercial leases 2,966  2  3,563 
Total commercial loans and leases 73,627  64  70,889  64 
Consumer loans:
Residential mortgage loans 17,814  16  17,733  16 
Home equity 5,581  5  6,267 
Indirect secured consumer loans 12,599  11  10,707  10 
Credit card 2,134  2  2,448 
Other consumer loans 2,858  2  2,622 
Total consumer loans 40,986  36  39,777  36 
Total average loans and leases $ 114,613  100   % $ 110,666  100   %
Total average portfolio loans and leases
(excluding loans and leases held for sale)
$ 113,362  $ 109,541 

Average loans and leases, including average loans and leases held for sale, increased $3.9 billion, or 4%, for the three months ended September 30, 2020 compared to the same period in the prior year as a result of a $2.7 billion, or 4%, increase in average commercial loans and leases as well as a $1.2 billion, or 3%, increase in average consumer loans.

Average commercial loans and leases increased $2.7 billion for the three months ended September 30, 2020 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 September 30, 2020 compared to the same period in the prior year primarily driven by the aforementioned increases in PPP loans. Average commercial mortgage loans increased $376 million, or 4%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of increases in loan originations and permanent financing from the Bancorp’s commercial construction loan portfolio. Average commercial construction loans increased $267 million, or 5%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of increased line of credit utilization as well as lower levels of payoffs. Average commercial leases decreased $597 million, or 17%, for the three months ended September 30, 2020 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 $1.2 billion for the three months ended September 30, 2020 compared to the same period in the prior year due to increases in average indirect secured consumer loans, average other consumer loans and average residential mortgage loans, partially offset by decreases in average home equity and average credit card. Average indirect secured consumer loans increased $1.9 billion, or 18%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to loan production exceeding payoffs. Average other consumer loans increased $236 million, or 9%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of increases in loan originations. Average residential mortgage loans increased $81 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by the repurchase of certain loans from GNMA that were in forbearance programs, partially offset by higher runoff due to payoffs exceeding loan originations. Average home equity decreased $686 million, or 11%, for the three months ended September 30, 2020 compared to the same period in the prior year as payoffs exceeded loan originations. Average credit card decreased $314 million, or 13%, for the three months ended September 30, 2020 compared to the same period in the prior year driven by the negative economic impacts from the COVID-19 pandemic, including reductions in the number of active accounts as well as purchase and balance activity per active account.

Investment Securities
The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity to satisfy regulatory requirements. Total investment securities were $38.4 billion and $36.9 billion at September 30, 2020 and December 31, 2019, respectively. The taxable available-for-sale debt and other investment securities portfolio had an effective duration of 4.6 years at September 30, 2020 compared to 5.1 years at December 31, 2019.

Debt securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At September 30, 2020, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt and other
27


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
securities. The Bancorp held an immaterial amount in below-investment grade available-for-sale debt and other securities at both September 30, 2020 and December 31, 2019.

Upon adoption of ASU 2016-13 on January 1, 2020, the Bancorp evaluates available-for-sale debt and other securities in an unrealized loss position to determine whether all or a portion of the unrealized loss on such securities is a credit loss. If credit losses are identified, they are generally recognized as an allowance for credit losses (a contra account to the amortized cost basis of the securities) with the periodic change in the allowance recognized in earnings. Prior to January 1, 2020, investment securities were evaluated for OTTI with any identified OTTI recognized as a charge to income and a direct reduction of the amortized cost basis of the securities.

At September 30, 2020, 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 for the three and nine months ended September 30, 2020 related to available-for-sale debt and other securities in an unrealized loss position. During the three and nine months ended September 30, 2019, the Bancorp recognized zero and $1 million, respectively, of OTTI on its available-for-sale debt and other securities, included in securities gains, net, in the Condensed Consolidated Statements of Income.

The following table summarizes the end of period components of investment securities:
TABLE 17: Components of Investment Securities

As of ($ in millions)
September 30,
2020
December 31, 2019
Available-for-sale debt and other securities (amortized cost basis):
U.S. Treasury and federal agency securities $ 75  74 
Obligations of states and political subdivisions securities 17  18 
Mortgage-backed securities:
Agency residential mortgage-backed securities 11,711  13,746 
Agency commercial mortgage-backed securities 16,173  15,141 
Non-agency commercial mortgage-backed securities 3,317  3,242 
Asset-backed securities and other debt securities 2,869  2,189 
Other securities(a)
531  556 
Total available-for-sale debt and other securities $ 34,693  34,966 
Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities $ 13  15 
Asset-backed securities and other debt securities 2 
Total held-to-maturity securities $ 15  17 
Trading debt securities (fair value):
U.S. Treasury and federal agency securities $ 84 
Obligations of states and political subdivisions securities 39 
Agency residential mortgage-backed securities 46  55 
Asset-backed securities and other debt securities 535  231 
Total trading debt securities $ 704  297 
Total equity securities (fair value) $ 277  564 
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $47, $482 and $2, respectively, at September 30, 2020 and $76, $478 and $2, respectively, at December 31, 2019, that are carried at cost.

On an amortized cost basis, available-for-sale debt and other securities decreased $273 million from December 31, 2019 primarily due to a decrease in agency residential mortgage-backed securities, partially offset by increases in agency commercial mortgage-backed securities and asset-backed securities and other debt securities.

On an amortized cost basis, available-for-sale debt and other securities were 19% and 24% of total interest-earning assets at September 30, 2020 and December 31, 2019, respectively. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.1 years at September 30, 2020 compared to 6.6 years at December 31, 2019. In addition, at September 30, 2020, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.09% compared to 3.22% at December 31, 2019.

Information presented in Table 18 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 gains on the available-for-sale debt and other securities portfolio were $2.7 billion at September 30, 2020 compared to $1.1 billion at December 31, 2019. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 18: Characteristics of Available-for-Sale Debt and Other Securities
As of September 30, 2020 ($ in millions)
Amortized Cost

Fair Value
Weighted-Average Life
(in years)
Weighted-Average Yield
U.S. Treasury and federal agency securities:
Average life 1 – 5 years $ 75  78  2.3 2.12   %
Total $ 75  78  2.3 2.12   %
Obligations of states and political subdivisions securities:
Average life of 1 year or less —  —  0.3 5.90 
Average life 1 – 5 years 17  17  2.4 1.81 
Total $ 17  17  2.4 1.82  %
Agency residential mortgage-backed securities:
Average life of 1 year or less 101  104  0.8 4.84 
Average life 1 – 5 years 5,839  6,202  3.6 3.15 
Average life 5 – 10 years 4,973  5,397  6.7 3.06 
Average life greater than 10 years 798  900  14.0 3.04 
Total $ 11,711  12,603  5.6 3.12   %
Agency commercial mortgage-backed securities:(a)
Average life of 1 year or less 387  406  0.8 3.71 
Average life 1 – 5 years 4,557  4,907  3.1 3.40 
Average life 5 – 10 years 8,339  9,206  7.3 3.04 
Average life greater than 10 years 2,890  3,231  13.1 3.18 
Total $ 16,173  17,750  7.0 3.18   %
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less 27  28  0.6 3.45 
Average life 1 – 5 years 2,623  2,814  3.9 3.28 
Average life 5 – 10 years 667  733  5.8 3.26 
Total $ 3,317  3,575  4.2 3.28   %
Asset-backed securities and other debt securities:
Average life of 1 year or less 205  208  0.6 3.94 
Average life 1 – 5 years 1,066  1,076  2.7 2.78 
Average life 5 – 10 years 1,284  1,275  6.9 1.82 
Average life greater than 10 years 314  312  12.3 1.32 
Total $ 2,869  2,871  5.5 2.27   %
Other securities 531  531 
Total available-for-sale debt and other securities $ 34,693  37,425  6.1 3.09   %
(a)Taxable-equivalent yield adjustments included in the above table are 0.03% and 0.01% 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. The Bancorp uses other short-term investments as part of its liquidity risk management tools. Other short-term investments were $31.3 billion and $2.0 billion at September 30, 2020 and December 31, 2019, respectively. The increase of $29.3 billion from December 31, 2019 was primarily attributable to deposit growth and repayment of commercial customers’ revolving line of credit draws from the first and second quarters of 2020. The Bank's commercial revolving line utilization at September 30, 2020 was 33%, compared to 38% at June 30, 2020 and 47% at March 31, 2020.

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 71% of the Bancorp’s average asset funding base at September 30, 2020 and December 31, 2019, respectively.

29


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the end of period components of deposits:
TABLE 19: Components of Deposits
September 30, 2020 December 31, 2019
As of ($ in millions) Balance % of Total Balance % of Total
Demand $ 51,896  33  % $ 35,968  28  %
Interest checking 49,566  32  40,409  33 
Savings 17,221  11  14,248  11 
Money market 31,192  20  27,277  21 
Foreign office 160    221  — 
Total transaction deposits 150,035  96  118,123  93 
Other time 3,337  2  5,237 
Total core deposits 153,372  98  123,360  97 
Certificates $100,000 and over(a)
3,311  2  3,702 
Total deposits $ 156,683  100  % $ 127,062  100   %
(a)Includes $2.5 billion and $2.1 billion of institutional, retail and wholesale certificates $250,000 and over at September 30, 2020 and December 31, 2019, respectively.

Core deposits increased $30.0 billion, or 24%, from December 31, 2019 as a result of an increase in transaction deposits, partially offset by a decrease in other time deposits. Transaction deposits increased $31.9 billion, or 27%, from December 31, 2019 primarily due to increases in demand deposits, interest checking deposits, money market deposits and savings deposits. Demand deposits increased $15.9 billion, or 44%, and interest checking deposits increased $9.2 billion, or 23%, from December 31, 2019 primarily as a result of higher balances per commercial customer account due to increased liquidity levels in the form of excess cash balances driven by the amount of fiscal stimulus during the nine months ended September 30, 2020. Money market deposits increased $3.9 billion, or 14%, from December 31, 2019 primarily as a result of higher balances per commercial customer account due to the previously mentioned increased liquidity levels in the current economic environment as well as higher demand for low-risk investment alternatives and decreased consumer spending amidst uncertainty regarding the COVID-19 pandemic. Savings deposits increased $3.0 billion, or 21%, from December 31, 2019 primarily as a result of higher balances per customer account due to uncertainty regarding the COVID-19 pandemic, fiscal stimulus as well as decreased consumer spending. Other time deposits decreased $1.9 billion, or 36%, from December 31, 2019 primarily due to lower offering rates on certificates less than $100,000.

Certificates $100,000 and over decreased $391 million, or 11%, from December 31, 2019 primarily due to a decrease in certificates of deposit issued since December 31, 2019 partially offset by an increase in retail brokered certificates of deposit issued since December 31, 2019.

The following table presents the components of average deposits for the three months ended:
TABLE 20: Components of Average Deposits
September 30, 2020 September 30, 2019
($ in millions) Balance % of Total Balance % of Total
Demand $ 50,414  32  % $ 35,223  28  %
Interest checking 49,800  32  37,729  30 
Savings 17,013  11  14,405  12 
Money market 31,151  20  26,962  22 
Foreign office 189    222  — 
Total transaction deposits 148,567  95  114,541  92 
Other time 3,711  2  5,823 
Total core deposits 152,278  97  120,364  96 
Certificates $100,000 and over(a)
3,633  3  4,795 
Other deposits     47  — 
Total average deposits $ 155,911  100  % $ 125,206  100  %
(a)Includes $2.6 billion of average institutional, retail and wholesale certificates $250,000 and over for both the three months ended September 30, 2020 and 2019.

On an average basis, core deposits increased $31.9 billion, or 27%, for the three months ended September 30, 2020 compared to the same period in the prior year due to an increase of $34.0 billion, or 30%, in average transaction deposits, partially offset by a decrease of $2.1 billion, or 36%, in average other time deposits. The increase in average transaction deposits was driven primarily by increases in average demand deposits, average interest checking deposits, average money market deposits and average savings deposits. Average demand deposits increased $15.2 billion, or 43%, and average interest checking deposits increased $12.1 billion, or 32%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of higher average balances per commercial customer account due to the previously mentioned increased liquidity levels in the current economic environment. Average money market deposits
30


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
increased $4.2 billion, or 16%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of higher average balances per commercial customer account due to the previously mentioned increased liquidity levels in the current economic environment as well as higher demand for low-risk investment alternatives and decreased consumer spending amidst uncertainty regarding the COVID-19 pandemic. Average savings deposits increased $2.6 billion, or 18%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily as a result of higher average balances per customer account due to uncertainty regarding the COVID-19 pandemic, fiscal stimulus as well as decreased consumer spending. Average other time deposits decreased primarily due to lower offering rates on certificates less than $100,000.

Average certificates $100,000 and over decreased $1.2 billion, or 24%, for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to a decrease in average certificates of deposit.

Contractual maturities
The contractual maturities of certificates $100,000 and over as of September 30, 2020 are summarized in the following table:
TABLE 21: Contractual Maturities of Certificates $100,000 and Over
($ in millions)
Next 3 months $ 1,567 
3-6 months 386 
6-12 months 1,088 
After 12 months 270 
Total certificates $100,000 and over $ 3,311 

The contractual maturities of other time deposits and certificates $100,000 and over as of September 30, 2020 are summarized in the following table:
TABLE 22: Contractual Maturities of Other Time Deposits and Certificates $100,000 and Over
($ in millions)
Next 12 months $ 5,865 
13-24 months 491 
25-36 months 128 
37-48 months 57 
49-60 months 84 
After 60 months 23 
Total other time deposits and certificates $100,000 and over $ 6,648 

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 16% for the three months ended September 30, 2020 and 2019, respectively.

The following table summarizes the end of period components of borrowings:
TABLE 23: Components of Borrowings
As of ($ in millions) September 30,
2020
December 31,
2019
Federal funds purchased $ 251  260 
Other short-term borrowings 1,196  1,011 
Long-term debt 15,123  14,970 
Total borrowings $ 16,570  16,241 

Total borrowings increased $329 million, or 2%, from December 31, 2019 primarily due to increases in other short-term borrowings and long-term debt. Other short-term borrowings increased $185 million from December 31, 2019 primarily as a result of increases in securities sold under repurchase agreements driven by an increase in commercial customer activity and in interest-bearing obligations associated with collateral held for certain derivatives. 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 16 of the Notes to Condensed Consolidated Financial Statements. Long-term debt increased $153 million from December 31, 2019 primarily driven by the issuance of $1.25 billion of unsecured senior fixed-rate bank notes in January 2020, the issuance of $1.25 billion of unsecured senior fixed-rate notes in May 2020 and $186 million of fair value adjustments associated with interest rate swaps hedging long-term debt during the nine months ended September 30, 2020. These increases were partially offset by the maturity of $1.1 billion of
31


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
unsecured senior fixed-rate notes, the maturity of $750 million of unsecured senior fixed-rate bank notes, the maturity of $300 million of unsecured senior floating-rate bank notes and $444 million of paydowns on long-term debt associated with automobile loan securitizations during the nine months ended September 30, 2020.

The following table summarizes components of average borrowings for the three months ended:
TABLE 24: Components of Average Borrowings
($ in millions) September 30,
2020
September 30,
2019
Federal funds purchased $ 273  739 
Other short-term borrowings 1,626  1,278 
Long-term debt 16,230  15,633 
Total average borrowings $ 18,129  17,650 

Total average borrowings increased $479 million, or 3%, for the three months ended September 30, 2020 compared to the same period in the prior year due to increases in average long-term debt and average other short-term borrowings, partially offset by a decrease in average federal funds purchased. Average long-term debt increased $597 million for the three months ended September 30, 2020 compared to the same period in the prior year driven by the issuances of $1.25 billion of unsecured senior fixed-rate bank notes and $1.25 billion of unsecured senior fixed-rate notes during the nine months ended September 30, 2020 and the issuance of $750 million of unsecured senior fixed-rate notes in the fourth quarter of 2019. These increases were partially offset by the maturity of $1.1 billion in unsecured senior fixed-rate notes, the maturity of $750 million in unsecured senior fixed-rate bank notes, the maturity of $250 million in unsecured senior floating-rate bank notes and $620 million of paydowns on long-term debt associated with automobile loan securitizations since September of 2019. Average other short-term borrowings increased $348 million for the three months ended September 30, 2020 compared to the same period in the prior year, primarily driven by an increase in obligations recognized by the Bancorp under ASC Topic 860 related to certain loans sold to GNMA and serviced by the Bancorp. For further information refer to Note 16 of the Notes to Condensed Consolidated Financial Statements. Average federal funds purchased decreased $466 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to lower short-term funding needs given core deposit growth. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorp’s liquidity management.

32


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
BUSINESS SEGMENT REVIEW
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Additional information on each business segment is included in Note 25 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 have declined since December 31, 2019 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 declined due to lower interest rates and modified assumptions. Thus, net interest income for asset-generating business segments improved while deposit-providing business segments were negatively impacted during the nine months ended September 30, 2020.

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

The following table summarizes net income (loss) by business segment:
TABLE 25: Net Income (Loss) by Business Segment
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income Statement Data
Commercial Banking $ 12  393  249  1,082 
Branch Banking 15  217  273  674 
Consumer Lending 25  44  134  70 
Wealth and Asset Management 21  32  84  81 
General Corporate and Other 508  (137) 83  (129)
Net income $ 581  549  823  1,778 

33


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 26: Commercial Banking
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income Statement Data
Net interest income (FTE)(a)
$ 435  627  1,522  1,774 
Provision for credit losses 337  54  839  100 
Noninterest income:
Commercial banking revenue 125  122  386  329 
Service charges on deposits 91  79  253  227 
Leasing business revenue 77  92  207  199 
Other noninterest income 25  42  51  106 
Noninterest expense:
Compensation and benefits 127  118  405  346 
Leasing business expense 35  40  103  97 
Other noninterest expense 249  267  786  755 
Income before income taxes (FTE) 5  483  286  1,337 
Applicable income tax expense (benefit)(a)(b)
(7) 90  37  255 
Net income $ 12  393  249  1,082 
Average Balance Sheet Data
Commercial loans and leases, including held for sale $ 65,162  67,490  68,235  64,911 
Demand deposits 25,926  16,737  22,011  16,243 
Interest checking deposits 28,385  19,225  25,868  17,845 
Savings and money market deposits 7,545  5,541  6,490  4,728 
Other time deposits and certificates $100,000 and over 145  362  170  352 
Foreign office deposits 187  221  192  197 
(a)Includes FTE adjustments of $3 and $4 for the three months ended September 30, 2020 and 2019, respectively, and $10 and $13 for the nine months ended September 30, 2020 and 2019, 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 $12 million for the three months ended September 30, 2020 compared to $393 million for the same period in the prior year. The decrease was primarily driven by an increase in provision for credit losses as well as decreases in net interest income on an FTE basis and noninterest income partially offset by a decrease in noninterest expense. Net income was $249 million for the nine months ended September 30, 2020 compared to $1.1 billion for the same period in the prior year. The decrease was primarily driven by an increase in provision for credit losses, a decrease in net interest income on an FTE basis as well as an increase in noninterest expense partially offset by an increase in noninterest income.

Net interest income on an FTE basis decreased $192 million and $252 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in yields on average commercial loans and leases as well as decreases in FTP credit rates on demand deposits, interest checking deposits and savings and money market deposits. These negative impacts were partially offset by decreases in FTP charge rates on loans and leases as well as decreases in rates paid on average interest checking deposits and average savings and money market deposits.

Provision for credit losses increased $283 million and $739 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in commercial criticized asset levels as well as increases in net charge-offs on commercial and industrial loans, commercial mortgage loans and commercial leases. Net charge-offs as a percent of average portfolio loans and leases increased to 35 bps for both the three and nine months ended September 30, 2020 compared to 16 bps and 12 bps for the same periods in the prior year, respectively.

34


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest income decreased $17 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreases in other noninterest income and leasing business revenue partially offset by an increase in service charges on deposits. Other noninterest income decreased $17 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by a decrease in private equity investment income, an increase in foreign exchange translation losses and a decrease in card and processing revenue. Leasing business revenue decreased $15 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in lease remarketing fees and operating lease income. Service charges on deposits increased $12 million for the three months ended September 30, 2020 compared to the same period in the prior year driven by an increase in commercial deposit fees primarily due to lower earnings credit rates. Noninterest income increased $36 million for the nine months ended September 30, 2020 compared to the same period in the prior year driven by increases in commercial banking revenue, service charges on deposits and leasing business revenue partially offset by a decrease in other noninterest income. Commercial banking revenue increased $57 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to increases in institutional sales and bridge fees partially offset by a decrease in loan syndication fees. Service charges on deposits increased $26 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in commercial deposit fees primarily due to lower earnings credit rates. Leasing business revenue increased $8 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by increases in lease syndication fees and operating lease income partially offset by a decrease in lease remarketing fees. Other noninterest income decreased $55 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by a decrease in private equity investment income, an increase in foreign exchange translation losses and a decrease in card and processing revenue.

Noninterest expense decreased $14 million for the three months ended September 30, 2020 compared to the same period in the prior year driven by decreases in other noninterest expense and leasing business expense partially offset by an increase in compensation and benefits. Other noninterest expense decreased $18 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in corporate overhead allocations, travel expense and losses and adjustments partially offset by an increase in FDIC insurance and other taxes. Leasing business expense decreased $5 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to a decrease in operating lease expense. Compensation and benefits increased $9 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to increases in base compensation and employee benefits expense partially offset by a decrease in incentive compensation. Noninterest expense increased $96 million for the nine months ended September 30, 2020 compared to the same period in the prior year driven by increases in compensation and benefits, other noninterest expense and leasing business expense. Compensation and benefits increased $59 million for the nine months ended September 30, 2020 compared to the same period in the prior year due to an increase in personnel costs primarily as a result of the MB Financial, Inc. acquisition at the end of the first quarter of 2019 as well as strategic hiring. Other noninterest expense increased $31 million for the nine months ended September 30, 2020, compared to the same period in the prior year primarily due to increases in losses and adjustments, FDIC insurance and other taxes and corporate overhead allocations partially offset by a decrease in travel expense. Leasing business expense increased $6 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in operating lease expense driven by the MB Financial, Inc. acquisition at the end of the first quarter of 2019.

Average commercial loans and leases decreased $2.3 billion and increased $3.3 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2020 was primarily driven by decreases in average commercial and industrial loans and average commercial leases partially offset by an increase in average commercial mortgage loans. The increase for the nine months ended September 30, 2020 was primarily due to increases in average commercial and industrial loans and average commercial mortgage loans partially offset by a decrease in average commercial leases. Average commercial and industrial loans decreased $2.4 billion and increased $2.1 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2020 was primarily driven by lower loan production as well as an increase in payoffs on revolving lines of credit. The increase for the nine months ended September 30, 2020 was primarily driven by the MB Financial, Inc. acquisition at the end of the first quarter of 2019. Average commercial mortgage loans increased $407 million and $1.5 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily as a result of increases in loan originations and permanent financing from the Bancorp's commercial construction loan portfolio. Average commercial leases decreased $604 million and $568 million for the three and nine months ended September 30, 2020, respectively, 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 core deposits increased $20.3 billion and $15.5 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to increases in average interest checking deposits, average demand deposits and average savings and money market deposits. Average interest checking deposits increased $9.2 billion and $8.0 billion, respectively, average demand deposits increased $9.2 billion and $5.8 billion, respectively, and average savings and money market deposits increased $2.0 billion and $1.8 billion, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in the prior year. These increases were primarily as a result of higher average balances per commercial customer account due to increased liquidity levels in the current economic environment.

35


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Branch Banking
Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,122 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

The following table contains selected financial data for the Branch Banking segment:
TABLE 27: Branch Banking
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income Statement Data
Net interest income $ 355  598  1,372  1,802 
Provision for credit losses 68  58  182  164 
Noninterest income:
Card and processing revenue 76  74  209  212 
Service charges on deposits 53  65  160  191 
Wealth and asset management revenue 44  41  128  117 
Other noninterest income 19  24  58  70 
Noninterest expense:
Compensation and benefits 162  148  491  444 
Net occupancy and equipment expense 54  56  162  165 
Card and processing expense 28  32  86  92 
Other noninterest expense 216  233  660  674 
Income before income taxes 19  275  346  853 
Applicable income tax expense 4  58  73  179 
Net income $ 15  217  273  674 
Average Balance Sheet Data
Consumer loans $ 12,573  13,203  12,939  13,203 
Commercial loans, including held for sale 2,260  2,216  2,281  2,144 
Demand deposits 21,174  16,038  19,137  15,646 
Interest checking deposits 12,944  10,875  12,260  10,561 
Savings and money market deposits 38,015  33,843  36,400  32,832 
Other time deposits and certificates $100,000 and over 4,771  8,110  5,771  7,514 
Net income was $15 million for the three months ended September 30, 2020 compared to net income of $217 million for the same period in the prior year. The decrease was primarily driven by decreases in net interest income and noninterest income as well as an increase in provision for credit losses partially offset by a decrease in noninterest expense. Net income was $273 million for the nine months ended September 30, 2020 compared to net income of $674 million for the same period in the prior year. The decrease in net income was primarily due to decreases in net interest income and noninterest income as well as increases in noninterest expense and provision for credit losses.

Net interest income decreased $243 million and $430 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to decreases in FTP credit rates on core deposits and FTP credits on certificates $100,000 and over as well as decreases in yields on and average balances of home equity and credit card. These negative impacts were partially offset by decreases in the rates paid on average savings and money market deposits and decreases in the rates paid on and average balances of other time deposits and certificates $100,000 and over as well as decreases in FTP charge rates on loans and leases. The decrease for the nine months ended September 30, 2020 compared to the same period in the prior year was also partially offset by an increase in average other consumer loans.

Provision for credit losses increased $10 million and $18 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to an increase in commercial criticized asset levels partially offset by decreases in net charge-offs on other consumer loans, credit card and home equity. Net charge-offs as a percent of average portfolio loans and leases decreased to 113 bps and 133 bps for the three and nine months ended September 30, 2020, respectively, compared to 149 bps and 143 bps for the three and nine months ended September 30, 2019, respectively.

Noninterest income decreased $12 million and $35 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in service charges on deposits and other noninterest income partially offset by increases in wealth and asset management revenue. Service charges on deposits decreased $12 million and $31 million for the three and
36


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
nine months ended September 30, 2020, respectively, compared to the same periods in the prior year driven by decreases in both consumer deposit fees and commercial deposit fees. Other noninterest income decreased $5 million and $12 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in cardholder fees and increases in net losses on disposition and impairment of bank premises and equipment. Wealth and asset management revenue increased $3 million and $11 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to increases in broker income and private client service fees.

Noninterest expense decreased $9 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreases in other noninterest expense and card and processing expense partially offset by an increase in compensation and benefits. Other noninterest expense decreased $17 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to decreases in marketing expense and losses and adjustments partially offset by an increase in FDIC insurance and other taxes. Card and processing expense decreased $4 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by a decrease in customer spend volume. Compensation and benefits increased $14 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by increases in base compensation and employee benefits expense. Noninterest expense increased $24 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in compensation and benefits partially offset by decreases in other noninterest expense and card and processing expense. Compensation and benefits increased $47 million for the nine months ended September 30, 2020 compared to the same period in the prior year driven by increased personnel costs. Other noninterest expense decreased $14 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by decreases in marketing expense and losses and adjustments partially offset by increases in corporate overhead allocations and FDIC insurance and other taxes. Card and processing expense decreased $6 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by a decrease in customer spend volume.

Average consumer loans decreased $630 million and $264 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in average home equity of $630 million and $465 million, respectively, as payoffs exceeded loan originations. The decrease for the three months ended September 30, 2020 also included a decrease in average credit card of $311 million driven by the negative economic impacts from the COVID-19 pandemic, including reductions in the number of active accounts as well as purchase and balance activity per active account. The decrease for the three months ended September 30, 2020 was partially offset by an increase in average residential mortgage loans of $268 million primarily due to loan production exceeding payoffs. The decrease for the nine months ended September 30, 2020 was partially offset by an increase in average other consumer loans of $248 million primarily as a result of increases in loan originations.

Average deposits increased $8.0 billion and $7.0 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in average savings and money market deposits, average demand deposits and average interest checking deposits partially offset by decreases in average other time deposits and certificates $100,000 and over. Average savings and money market deposits increased $4.2 billion and $3.6 billion and average demand deposits increased $5.1 billion and $3.5 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily as a result of higher balances per customer account due to uncertainty regarding the COVID-19 pandemic, fiscal stimulus as well as decreased consumer spending. Average interest checking deposits increased $2.1 billion and $1.7 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily as a result of higher balance per customer account, fiscal stimulus as well as decreased consumer spending. Average other time deposits and certificates $100,000 and over decreased $3.3 billion and $1.7 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to lower offering rates on certificates less than $100,000 as well as decreases in average certificates $100,000 and over for the three months ended September 30, 2020.

37


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Consumer Lending
Consumer Lending includes the Bancorp’s residential mortgage, automobile and other indirect lending activities. Residential mortgage activities within Consumer Lending include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans and all associated hedging activities. Residential mortgages are primarily originated through a dedicated sales force and through third-party correspondent lenders. Automobile and other indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers.

The following table contains selected financial data for the Consumer Lending segment:
TABLE 28: Consumer Lending
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income Statement Data
Net interest income $ 98  88  279  234 
Provision for credit losses 2  14  25  34 
Noninterest income:
Mortgage banking net revenue 72  92  286  209 
Other noninterest income 1  11  15 
Noninterest expense:
Compensation and benefits 57  48  162  146 
Other noninterest expense 80  66  220  189 
Income before income taxes 32  56  169  89 
Applicable income tax expense 7  12  35  19 
Net income $ 25  44  134  70 
Average Balance Sheet Data
Residential mortgage loans, including held for sale $ 13,126  13,447  13,167  12,863 
Home equity 187  206  197  224 
Indirect secured consumer loans 12,425  10,476  11,990  9,788 

Net income was $25 million for the three months ended September 30, 2020 compared to net income of $44 million for the same period in the prior year. The decrease was primarily due to an increase in noninterest expense as well as a decrease in noninterest income partially offset by a decrease in provision for credit losses and an increase in net interest income. Net income was $134 million for the nine months ended September 30, 2020 compared to net income of $70 million for the same period in the prior year. The increase was primarily driven by increases in noninterest income and net interest income as well as a decrease in provision for credit losses partially offset by an increase in noninterest expense.

Net interest income increased $10 million and $45 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in average indirect secured consumer loans and decreases in FTP charge rates on loans and leases partially offset by decreases in FTP credit rates on demand deposits and yields on average residential mortgage loans as well as increases in average other short-term borrowings.

Provision for credit losses decreased $12 million and $9 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in net charge-offs on indirect secured consumer loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 3 bps and 14 bps for the three and nine months ended September 30, 2020, respectively, compared to 24 bps and 21 bps for the three and nine months ended September 30, 2019, respectively.

Noninterest income decreased $23 million and increased $73 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year driven by fluctuations in mortgage banking net revenue. The decrease for the three months ended September 30, 2020 compared to the same period in the prior year was primarily due to a decrease in net mortgage servicing revenue partially offset by an increase in origination fees and gains on loan sales. The increase for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily due to an increase in origination fees and gains on loan sales partially offset by a decrease in net mortgage servicing 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.

Noninterest expense increased $23 million and $47 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year due to increases in other noninterest expense and compensation and benefits. Other noninterest expense increased $14 million and $31 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in corporate overhead allocations and losses and adjustments partially offset by decreases in
38


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
OREO expense. Compensation and benefits increased $9 million and $16 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to increases in incentive compensation and base compensation resulting from the increased mortgage origination activity for the nine months ended September 30, 2020.

Average consumer loans increased $1.6 billion for the three months ended September 30, 2020 compared to the same period in the prior year primarily due to an increase in average indirect secured consumer loans partially offset by a decrease in average residential mortgage loans. Average consumer loans increased $2.5 billion for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to increases in average indirect secured consumer loans and average residential mortgage loans. Average indirect secured consumer loans increased $1.9 billion and $2.2 billion for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily due to loan production exceeding payoffs. Average residential mortgage loans decreased $321 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by higher runoff due to payoffs exceeding loan originations partially offset by the repurchase of certain loans from GNMA that were in forbearance programs. Average residential mortgage loans increased $304 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily driven by the previously mentioned repurchase of certain loans from GNMA partially offset by higher runoff due to payoffs exceeding loan originations.

Wealth and Asset Management
Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. Fifth Third Insurance Agency assists clients with their financial and risk management needs. Fifth Third Private Bank offers wealth management strategies to high net worth and ultra-high net worth clients through wealth planning, investment management, banking, insurance, trust and estate services. Fifth Third Institutional Services provides advisory services for institutional clients including middle market businesses, nonprofits, states and municipalities.

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

TABLE 29: Wealth and Asset Management
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Income Statement Data
Net interest income $ 28  44  116  141 
Provision for credit losses   —    — 
Noninterest income:
Wealth and asset management revenue 126  119  371  345 
Other noninterest income 6  19  14 
Noninterest expense:
Compensation and benefits 54  51  165  165 
Other noninterest expense 79  78  235  232 
Income before income taxes 27  40  106  103 
Applicable income tax expense 6  22  22 
Net income 21  32  84  81 
Average Balance Sheet Data
Loans and leases, including held for sale 3,678  3,636  3,618  3,566 
Core deposits 10,932  9,679  10,848  9,548 
Net income was $21 million for the three months ended September 30, 2020 compared to net income of $32 million for the same period in the prior year. The decrease was primarily driven by a decrease in net interest income and an increase in noninterest expense partially offset by an increase in noninterest income. Net income was $84 million for the nine months ended September 30, 2020 compared to net income of $81 million for the same period in the prior year. The increase was primarily driven by an increase in noninterest income partially offset by a decrease in net interest income.

Net interest income decreased $16 million and $25 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by decreases in FTP credit rates on interest checking deposits, savings and money market deposits and demand deposits as well as decreases in yields on average loans and leases. These negative impacts were partially offset by decreases in the rates paid on average interest checking deposits and average savings and money market deposits as well as decreases in FTP charge rates on loans and leases.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest income increased $7 million and $31 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in wealth and asset management revenue. The increase for the nine months ended September 30, 2020 also included an increase in other noninterest income. Wealth and asset management revenue increased $7 million and $26 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily as a result of increases in broker income, private client service fees and institutional fees. Other noninterest income increased $5 million for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to a loss on sale of a business recognized during the nine months ended September 30, 2019.

Noninterest expense increased $4 million for the three months ended September 30, 2020 compared to the same period in the prior year primarily driven by an increase in compensation and benefits primarily driven by increases in incentive compensation and deferred compensation expense. Noninterest expense increased $3 million for the nine months ended September 30, 2020 compared to the same period in the prior year driven by an increase in other noninterest expense primarily due to an increase in corporate overhead allocations partially offset by a decrease in travel expense.

Average loans and leases, including held for sale, increased $42 million and $52 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year primarily driven by increases in average residential mortgage loans and average other consumer loans as a result of higher loan production partially offset by decreases in average commercial and industrial loans as payoffs exceeded new loan production.

Average core deposits increased $1.3 billion for both the three and nine months ended September 30, 2020 compared to the same periods in the prior year primarily due to increases in average interest checking deposits and average savings and money market deposits as a result of higher balances per customer account due to the current economic environment.

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 increased $368 million and $690 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. The increases were primarily driven by decreases in FTP credit rates on deposits allocated to the business segments, increases in interest income on loans and leases and decreases in interest expense on long-term debt, federal funds purchased, deposits and other short-term borrowings. These positive impacts were partially offset by decreases in the benefit related to FTP charge rates on loans and leases and decreases in interest income on taxable securities.

The benefit from credit losses was $422 million for the three months ended September 30, 2020 compared to provision for credit losses of $8 million for the three months ended September 30, 2019. Provision for credit losses was $64 million for the nine months ended September 30, 2020 compared to provision for credit losses of $12 million for the nine months ended September 30, 2019. The decrease for the three months ended September 30, 2020 compared to the same period in the prior year was primarily driven by an increase in the allocation of provision expense to the business segments due to an increase in commercial criticized asset levels as well as a decrease in the ACL from the second quarter of 2020, which was driven by improved economic forecasts, improved consumer credit quality and lower period-end loan and lease balances. The increase for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily due to an increase in the ACL reflecting deterioration in the macroeconomic environment as a result of the impact of the COVID-19 pandemic, continued pressure on energy prices and the resulting impact of this environment on commercial borrowers. The increase was partially offset by an increase in the allocation of provision expense to the business segments driven by an increase in commercial criticized asset levels. The change in provision for credit losses for both periods also reflected the impact of the change in methodology for estimating credit losses from the incurred loss methodology to the expected credit loss methodology beginning in the first quarter of 2020.

Noninterest income increased $29 million and decreased $555 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2020 compared to the same period in the prior year was primarily driven by the recognition of securities gains of $51 million for the three months ended September 30, 2020 compared to securities gains of $5 million for the three months ended September 30, 2019. The increase for the three months ended September 30, 2020 compared to the same period in the prior year was partially offset by an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and a decrease in private equity investment income. The decrease for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily due to the recognition of a $562 million gain related to the sale of Worldpay, Inc. shares during the nine months ended September 30, 2019. The decrease was also driven by a decrease in private equity investment income and an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. These negative impacts were partially offset by the recognition of securities gains of $48 million for the nine months ended September 30, 2020 compared to securities gains of $30 million for the nine months ended September 30, 2019.

40


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Noninterest expense remained flat and decreased $179 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. Noninterest expense for the three months ended September 30, 2020 included a decrease in technology and communications expense, an increase in corporate overhead allocations from General Corporate and Other to the other business segments as well as decreases in travel expense and marketing expense. These impacts to noninterest expense were offset by an increase in compensation and benefits. The decrease for the nine months ended September 30, 2020 compared to the same period in the prior year was primarily driven by an increase in corporate overhead allocations from General Corporate and Other to the other business segments and decreases in compensation and benefits, technology and communications expense, marketing expense and travel expense.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
RISK MANAGEMENT – OVERVIEW
Effective risk management is critical to the Bancorp’s ongoing success and ensures that the Bancorp operates in a safe and sound manner, complies with applicable laws and regulations and safeguards the Bancorp’s brand and reputation. Risks are inherent in the Bancorp’s business, and the Bancorp is responsible for managing these risks effectively to deliver through-the-cycle value and performance for the Bancorp’s shareholders, customers, employees and communities.

Fifth Third’s Risk Management Framework, which is approved annually by the ERMC, RCC and the Board of Directors, includes the following key elements:
The Bancorp ensures transparency and escalation of risk through defined risk policies and a governance structure that includes the Risk and Compliance Committee of the Board of Directors, the Enterprise Risk Management Committee and other management-level risk committees and councils.
The Bancorp establishes a risk appetite in alignment with its strategic, financial and capital plans. The Bancorp’s risk appetite is defined using quantitative metrics and qualitative measures to ensure prudent risk taking and drive balanced decision making. The Bancorp’s goal is to ensure that aggregate residual risks do not exceed the Bancorp’s risk appetite, and that risks taken are supportive of the Bancorp’s portfolio diversification and profitability objectives. The Board and executive management define the risk appetite, which is considered in the development of business strategies and forms the basis for risk management.
The core principles that define the Bancorp’s risk appetite are as follows:
To act with integrity in all activities.
To understand the risks taken and ensure that they are in alignment with the Bancorp’s business strategies and risk appetite.
To avoid risks that cannot be understood, managed or monitored.
To provide transparency of risk to the Bancorp’s management and Board by escalating risks and issues as necessary.
To ensure Fifth Third’s products and services are aligned to the Bancorp’s core customer base and are designed, delivered and maintained to provide value and benefit to the Bancorp’s customers and to Fifth Third.
Not to offer products or services that are not appropriate or suitable for the Bancorp’s customers.
Focus on providing operational excellence by providing reliable, accurate, and efficient services to meet the Bancorp’s customers’ needs.
To maintain a strong financial position to ensure the Bancorp meets its strategic objectives through all economic cycles and is able to access the capital markets at all times, even under stressed conditions.
To protect the Bancorp’s reputation by thoroughly understanding the consequences of business strategies, products and processes.
To conduct the Bancorp’s business in compliance with all applicable laws, rules and regulations and in alignment with internal policies and procedures.
Fifth Third’s core values and culture provide the foundation for sound risk management practices by establishing expectations for appropriate conduct and accountability across the organization. All employees are expected to conduct themselves in alignment with Fifth Third’s Code of Business Conduct & Ethics, which may be found on www.53.com, while carrying out their responsibilities. Fifth Third’s Corporate Responsibility and Reputation Committee provides oversight of business conduct policies, programs and strategies, and monitors reporting of potential misconduct, trends or themes across the enterprise. Prudent risk management is a responsibility that is expected from all employees across the first, second and third lines of defense and is a foundational element of Fifth Third’s culture.
The Bancorp manages eight defined risk types to a prescribed appetite. The risk types are credit risk, liquidity risk, interest rate risk, price risk, legal and regulatory compliance risk, operational risk, reputational risk and strategic risk.
Fifth Third’s Risk Management Process provides a consistent and integrated approach for managing risks. The five components of the Risk Management Process are: identify, assess, manage, monitor and report. The Bancorp has also established processes and programs to manage and report concentration risks, to ensure robust talent, compensation and performance management and to aggregate risks across the enterprise.

Fifth Third drives accountability for managing risk through its Three Lines of Defense structure:
The first line of defense is comprised of front line units that create risk and are accountable for managing risk. These groups are the Bancorp’s primary risk takers and are responsible for implementing effective internal controls and maintaining processes for identifying, assessing, controlling and mitigating the risks associated with their activities consistent with established risk appetite and limits. The first line of defense also includes business units that provide information technology, operations, servicing, processing or other support.
The second line of defense, or Independent Risk Management, consists of Risk Management, Compliance and Credit Review. The second line is responsible for developing frameworks and policies to govern risk-taking activities, overseeing risk-taking of the organization, advising on controlling that risk and providing input on key risk decisions. Risk Management complements the front line’s management of risk-taking activities through its monitoring and reporting responsibilities, including adherence to the risk appetite. Additionally, Risk Management is responsible for identifying, measuring, monitoring and controlling aggregate risks enterprise-wide.
The third line of defense is Internal Audit, which provides oversight of the first and second lines of defense, and independent assurance to the Board on the effectiveness of governance, risk management and internal controls.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices which are described below. These practices include the use of intentional risk-based limits for single name exposures and counterparty selection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and defined weaknesses in financial performance. The Bancorp carefully designed and monitors underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides independent and objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the estimated losses expected in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate allowance for credit losses and record any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonaccrual loan or a restructured loan. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios utilizing various models. For certain portfolios, such as real estate and leveraged lending, stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.

The following tables provide a summary of potential problem portfolio loans and leases:
TABLE 30: Potential Problem Portfolio Loans and Leases
As of September 30, 2020 ($ in millions) Carrying
Value
Unpaid
Principal
Balance

Exposure
Commercial and industrial loans $ 2,823  2,834  3,792 
Commercial mortgage loans 685  705  690 
Commercial construction loans 57  57  69 
Commercial leases 87  87  87 
Total potential problem portfolio loans and leases $ 3,652  3,683  4,638 
TABLE 31: Potential Problem Portfolio Loans and Leases
As of December 31, 2019 ($ in millions) Carrying
Value
Unpaid
Principal
Balance

Exposure
Commercial and industrial loans $ 1,100  1,120  1,488 
Commercial mortgage loans 342  390  342 
Commercial construction loans 75  82  84 
Commercial leases 61  61  61 
Total potential problem portfolio loans and leases $ 1,578  1,653  1,975 
In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The first of these risk grading systems encompasses ten categories, which are based on regulatory guidance for credit risk systems. These ratings are used by the Bancorp to monitor and manage its credit risk. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a “through-the-cycle” rating philosophy for assessing a borrower’s creditworthiness. A “through-the-cycle” rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen probabilities of default grade categories and an additional eleven grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-category regulatory risk rating system.

The Bancorp has also developed models to estimate expected credit losses as part of the Bancorp’s adoption of ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” on January 1, 2020. 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 4 of the Notes to Condensed Consolidated Financial Statements for additional information about the Bancorp’s processes for developing these models,
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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.

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 credit card and 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
U.S. economic growth accelerated in the third quarter of 2020 as unprecedented fiscal and monetary policy accommodation continued to support risk assets and economic activity. These policies, along with an easing of government restrictions on activity, supported a robust recovery with real GDP increasing an annualized 33% during the third quarter of 2020. With investors expecting a sustained period of low interest rates, credit spreads continued to tighten as strong demand for duration and yield drove credit markets while the S&P 500 increased 8.5% during the third quarter of 2020 on the back of better than expected second quarter earnings. Financial market volatility increased in September of 2020 as investors contemplated an uncertain election outcome and the on-again off-again fiscal negotiations. At this point it appears unlikely Congress will agree to a new stimulus package this year and the outcome of the election will determine the path forward for fiscal policy. Meanwhile, COVID-19 rates of infection have begun to increase as temperatures turn cooler and people move indoors while the path to a vaccine remains uncertain at this time.

With this backdrop, policymakers are committed to providing additional accommodation to ensure a robust recovery from the COVID-19 pandemic. The U.S. budget deficit increased to $3.1 trillion for fiscal year 2020, relative to the size of the economy the deficit was 15% of GDP, the largest since 1945. At the annual Kansas City Fed Economic Policy Symposium, the FOMC adopted a new monetary policy framework with an emphasis on maximizing employment and a flexible average inflation target. “The Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” With the announcement, the FOMC officially ended the policy of preemptively hiking rates to avoid an uptick in inflation as the economy recovers. The FOMC also continued its policy of increasing holdings of treasury securities by $80 billion per month and agency mortgage-backed securities holdings by $40 billion per month. Since the end of February 2020, the Federal Reserve balance sheet has expanded $3 trillion to $7.2 trillion, or 34%, of U.S. GDP.

COVID-19 Hardship Relief Programs
In response to the COVID-19 pandemic, beginning in March 2020, the Bancorp began providing financial hardship relief to borrowers that were negatively impacted by the pandemic and its related economic impacts. For retail borrowers, these relief programs included three-month payment deferrals for non-real estate secured and unsecured portfolios, six-month payment deferrals for home equity loans and lines of credit and six-month forbearances for residential mortgages. The Bancorp also temporarily waived fees for certain products and services, suspended initiating any new repossession actions on vehicles and suspended all residential foreclosure activity. The fee waiver, repossession suspension and payment deferral programs for non-real estate secured and unsecured and home equity loans and lines of credit were discontinued early in the third quarter of 2020. However, new programs to assist consumer customers are now being offered to meet the uniqueness of the current economic environment. These primarily include a short-term hardship program which allows for a reduced payment amount for six months with full payments resuming thereafter or placement into a loan modification program that could include permanent rate reductions or maturity extensions.

The Bancorp will continue to offer the six-month forbearance program for its residential mortgage borrowers until the end of 2020. Upon completion of the initial six-month forbearance period for residential mortgage loans, borrowers may request to extend the forbearance period for an additional period of up to six months. Additionally, the Bancorp will continue to follow the specific GSE guidance for other non-forbearance related COVID-19 pandemic relief programs when servicing its residential mortgage portfolio. These programs include
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
traditional loan modifications and/or deferral of past due payments to the maturity of the loan. The Bancorp has also extended its suspension of residential foreclosure activity through at least December 31, 2020, in alignment with GSE practices.

The Bancorp has also offered a variety of relief options to its commercial borrowers that have been impacted by the COVID-19 pandemic. While these offers are individually negotiated and tailored to each borrower’s specific facts and circumstances, the most commonly offered relief measures include temporary covenant waivers and/or deferrals of principal and/or interest payments for up to 90 days. After the deferral program, a customer may have the option to resume normal payments, enter into a formal loan modification program or restructure the loan arrangement.

Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for a summary of loans and leases that received payment deferrals or forbearances, as of September 30, 2020, under Fifth Third’s hardship relief programs offered in response to the COVID-19 pandemic.

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

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

Certain industries have experienced increased stress due to the COVID-19 pandemic. The following table presents industries impacted the most severely within the Bancorp’s commercial and industrial and commercial real estate loan portfolios as of September 30, 2020:
TABLE 32: Industries Impacted the Most Severely by the COVID-19 Pandemic
($ in millions) Balance Exposure
Industry Classification(b)
Commercial and industrial loans:(a)
Leisure and recreation(c)
$ 4,175  7,187  Accommodation and food / Entertainment and recreation
Retail - non-essential 1,197  3,323  Retail trade
Healthcare 818  1,615  Healthcare
Leisure travel 507  589  Transportation and warehousing
Total commercial and industrial loans 6,697  12,714 
Commercial real estate loans:
Leisure and recreation(c)
2,144  2,529  Accommodation and food / Entertainment and recreation
Retail - non-essential 1,371  1,371  Real estate
Healthcare 1,624  2,050  Healthcare
Total commercial real estate loans 5,139  5,950 
Total $ 11,836  18,664 
(a)Excludes PPP loans.
(b)As defined by the North American Industry Classification System.
(c)Balances include exposures to casinos, restaurants, sports, fitness, hotels and other.

Additionally, the Bancorp’s energy loan portfolio of $2.8 billion for oil and gas production and related industries was also impacted by significant declines in oil and gas prices during the nine months ended September 30, 2020.

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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 33: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale)
September 30, 2020 December 31, 2019
($ in millions) Outstanding Exposure Nonaccrual Outstanding Exposure Nonaccrual
By Industry:
Manufacturing $ 11,657  22,317  114  11,996  22,079  87 
Real estate 11,623  17,017  123  11,320  16,993 
Financial services and insurance 6,456  15,020  10  7,214  15,398  — 
Healthcare 5,505  8,251  31  4,984  7,206  38 
Business services 5,488  9,303  58  5,170  8,579  75 
Accommodation and food 4,430  6,591  38  3,745  6,525  21 
Wholesale trade 4,267  8,213  37  4,502  7,715  17 
Retail trade 3,804  8,701  6  3,948  8,255  39 
Communication and information 3,211  5,714  19  3,166  5,567 
Transportation and warehousing 3,071  4,751  12  2,880  4,996  12 
Mining 2,709  4,230  115  3,046  4,966  37 
Construction 2,653  5,875  10  2,526  5,327 
Entertainment and recreation 2,277  3,460  79  1,905  3,327  40 
Other services 1,459  1,883  23  1,224  1,662 
Utilities 1,181  3,040    991  2,672  — 
Public administration 955  1,454    782  1,107  — 
Agribusiness 294  540  10  344  554 
Other 135  136  2  151  153 
Individuals 75  123  1  64  128  — 
Total $ 71,250  126,619  688  69,958  123,209  397 
By Size:
Less than $1 million 7   % 5  10  10 
$1 million to $5 million 10  8  16  22 
$5 million to $10 million 7  6  12  11 
$10 million to $25 million 18  16  34  20  17  27 
$25 million to $50 million 23  23  28  24  24  30 
Greater than $50 million 35  42    36  43  — 
Total 100   % 100  100  100  100  100 
By State:
Illinois 14   % 12  27  15  12  18 
Ohio 11  13  5  10  11 
Florida 8  7  2 
Michigan 6  6  5 
Indiana 4  4   
Georgia 3  4  6  11 
North Carolina 3  3  3  10 
Tennessee 3  3  1 
Kentucky 2  2  5 
Other 46  46  46  47  48  30 
Total 100   % 100  100  100  100  100 

The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable), pro forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as-needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves.
46


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

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. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.
TABLE 34: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of September 30, 2020 ($ in millions) LTV > 100% LTV 80-100% LTV < 80%
Commercial mortgage owner-occupied loans $ 102  327  3,335 
Commercial mortgage nonowner-occupied loans 28  74  4,822 
Total $ 130  401  8,157 
TABLE 35: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of December 31, 2019 ($ in millions) LTV > 100% LTV 80-100% LTV < 80%
Commercial mortgage owner-occupied loans $ 126  393 3,199
Commercial mortgage nonowner-occupied loans 58  107 4,562
Total $ 184  500 7,761

The Bancorp views non-owner-occupied commercial real estate as a higher credit risk product compared to some other commercial loan portfolios due to the higher volatility of the industry.

The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):
TABLE 36: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)
As of September 30, 2020 ($ in millions)
For the three months ended September 30, 2020
For the nine months ended September 30, 2020
Outstanding Exposure 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs
By State:
Illinois $ 2,976  3,505  4  47    1 
Ohio 1,391  1,978    4     
Florida 1,080  1,672         
North Carolina 830  1,122    2     
Michigan 806  934    1     
Indiana 507  960         
All other states 3,502  5,489    48  10  12 
Total $ 11,092  15,660  4  102  10  13 
(a)Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

TABLE 37: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)(a)
As of September 30, 2019 ($ in millions)
For the three months ended September 30, 2019
For the nine months ended September 30, 2019
Outstanding Exposure 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs
By State:
Illinois $ 3,492  4,143  13  — 
Ohio 1,452  1,865  —  — 
Florida 1,003  1,584  —  —  —  — 
North Carolina 608  1,030  —  —  —  — 
Michigan 726  883  —  —  — 
Indiana 577  875  —  —  —  — 
All other states 3,211  5,254  —  —  —  — 
Total $ 11,069  15,634  16 
(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.

47


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Consumer Portfolio
Consumer credit risk management utilizes a framework that encompasses consistent processes for identifying, assessing, managing, monitoring and reporting credit risk. These processes are supported by a credit risk governance structure that includes Board oversight, policies, risk limits and risk committees.

The Bancorp’s consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity, indirect secured consumer loans, credit card and other consumer loans. The Bancorp has identified certain credit characteristics within these five categories of loans which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio. The Bancorp does not update LTVs for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans. Credit risk management continues to closely monitor the indirect secured consumer portfolio performance, which includes automobile loans. The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms and higher LTVs. The Bancorp has adjusted credit standards focused on improving risk-adjusted returns while maintaining credit risk tolerance. The Bancorp actively manages the automobile portfolio through concentration limits, which mitigate credit risk through limiting the exposure to lower FICO scores, higher advance rates and extended term originations.

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

The Bancorp does not originate residential mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed-rate and ARM loans. Within the ARM portfolio, approximately $563 million of ARM loans will have rate resets during the next twelve months. Of these resets, 4% are expected to experience an increase in rate, with an average increase of approximately 0.40%. Underlying characteristics of these borrowers are relatively strong with a weighted average origination DTI of 31% and weighted average origination LTV of 71%.

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

Portfolio residential mortgage loans from 2010 and later vintages represented 94% of the portfolio as of September 30, 2020 and had a weighted-average origination LTV of 73% and a weighted-average origination FICO of 761.

In response to the COVID-19 pandemic, the Bancorp has provided forbearances for up to six months for customers who are experiencing a hardship related to COVID-19, with an option for borrowers to extend the forbearance period for an additional period of up to six months upon request. Additionally, the Bancorp has introduced revised credit underwriting guidelines for new originations, raising the minimum FICO score at origination to 680 and lowering the maximum allowable LTV to 80%. For further information on reporting of past due loans, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.

The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:
TABLE 38: Residential Mortgage Portfolio Loans by LTV at Origination
September 30, 2020 December 31, 2019
($ in millions)
Outstanding
Weighted-
Average LTV

Outstanding
Weighted-
Average LTV
LTV ≤ 80% $ 11,455  65.7   % 12,100  66.3  %
LTV > 80%, with mortgage insurance(a)
2,583  95.5  2,373  95.2 
LTV > 80%, no mortgage insurance 2,120  91.4  2,251  93.1 
Total $ 16,158  74.3   % 16,724  74.3  %
(a)Includes loans with both borrower and lender paid mortgage insurance.

48


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 39: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance
As of September 30, 2020 ($ in millions)
For the three months ended September 30, 2020
For the nine months ended September 30, 2020
Outstanding 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs
By State:
Ohio $ 474  3  3  —  — 
Illinois 423  2  2  —  — 
Florida 299  1  2  —  — 
Michigan 194  2  1  —  — 
Indiana 160  1  1  —  — 
North Carolina 138  2  —  —  — 
Kentucky 94  1    —  — 
All other states 338  3  3  —  — 
Total $ 2,120  15  12  —  — 

TABLE 40: Residential Mortgage Portfolio Loans, LTV Greater Than 80% at Origination, No Mortgage Insurance
As of September 30, 2019 ($ in millions)
For the three months ended
September 30, 2019
For the nine months ended
September 30, 2019
Outstanding 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs (Recoveries)
By State:
Ohio $ 446  — 
Illinois 447  — 
Florida 277  —  (1)
Michigan 207  —  — 
Indiana 156  —  — 
North Carolina 97  —  —  — 
Kentucky 85  —  —  — 
All other states 321  —  — 
Total $ 2,036  13  — 

Home equity portfolio
The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have a 10-year interest-only draw period followed by a 20-year amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a 20-year term, minimum payments of interest-only and a balloon payment of principal at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 23% 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 has not been restructured in a TDR 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 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.

49


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 42 and Table 43. Of the total $5.5 billion of outstanding home equity loans:
●    91% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of September 30, 2020;
●    38% are in senior lien positions and 62% are in junior lien positions at September 30, 2020;
●    79% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended September 30, 2020; and
●    The portfolio had a weighted average refreshed FICO score of 747 at September 30, 2020.

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

The Bancorp has also introduced revised credit underwriting guidelines on new home equity originations in response to the COVID-19 pandemic, raising the minimum FICO score at origination to 720, lowering the maximum LTV to 80% and instituting more stringent verification of employment requirements. Additionally, applicants must have a Fifth Third deposit relationship to be considered for approval.

The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:
TABLE 41: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score
September 30, 2020 December 31, 2019
($ in millions) Outstanding % of Total Outstanding % of Total
Senior Liens:
FICO ≤ 659 $ 186  3   % $ 219   %
FICO 660-719 304  6  330 
FICO ≥ 720 1,589  29  1,732  28 
Total senior liens 2,079  38  2,281  37 
Junior Liens:
FICO ≤ 659 370  7  446 
FICO 660-719 632  12  716  12 
FICO ≥ 720 2,374  43  2,640  44 
Total junior liens 3,376  62  3,802  63 
Total $ 5,455  100   % $ 6,083  100   %

The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination as of:
TABLE 42: Home Equity Portfolio Loans Outstanding by LTV at Origination
September 30, 2020 December 31, 2019

($ in millions)

Outstanding
Weighted-
Average LTV

Outstanding
Weighted-
Average LTV
Senior Liens:
LTV ≤ 80% $ 1,787  53.8   % $ 1,964  53.8   %
LTV > 80% 292  89.1  317  88.8 
Total senior liens
2,079  59.0  2,281  58.9 
Junior Liens:
LTV ≤ 80% 1,958  66.5  2,213  66.8 
LTV > 80% 1,418  89.8  1,589  89.7 
Total junior liens
3,376  77.2  3,802  77.4 
Total $ 5,455  70.1   % $ 6,083  70.3   %

50


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables provide an analysis of home equity portfolio loans outstanding by state with a combined LTV greater than 80% at origination:
TABLE 43: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination
As of September 30, 2020 ($ in millions)
For the three months ended
September 30, 2020
For the nine months ended
September 30, 2020
Outstanding Exposure 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs
By State:
Ohio $ 1,035  2,324  —  11    1 
Michigan 197  361  —  5  —  — 
Illinois 176  282  2  7  —   
Indiana 89  174  —  3  —  — 
Kentucky 79  167  —  2  —  — 
Florida 44  69  —  2  —  — 
All other states 90  143  —  4  —  — 
Total $ 1,710  3,520  2  34    1 

TABLE 44: Home Equity Portfolio Loans Outstanding with an LTV Greater than 80% at Origination
As of September 30, 2019 ($ in millions)
For the three months ended
September 30, 2019
For the nine months ended
September 30, 2019
Outstanding Exposure 90 Days
Past Due
Nonaccrual Net Charge-offs Net Charge-offs
By State:
Ohio $ 1,138  2,390  —  — 
Michigan 255  439  —  —  — 
Illinois 176  291  —  — 
Indiana 111  203  —  —  — 
Kentucky 101  200  —  —  — 
Florida 53  81  —  —  — 
All other states 108  169  — 
Total $ 1,942  3,773  —  26 

Indirect secured consumer portfolio
The indirect secured consumer portfolio is comprised of $11.9 billion of automobile loans and $1 billion of indirect motorcycle, powersport, recreational vehicle and marine loans as of September 30, 2020. The concentration of lower FICO (≤659) origination balances remained within targeted credit risk tolerance during the nine months ended September 30, 2020. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.

The following table provides an analysis of indirect secured consumer portfolio loans outstanding disaggregated based upon FICO score at origination as of:
TABLE 45: Indirect Secured Consumer Portfolio Loans Outstanding by FICO Score at Origination
September 30, 2020 December 31, 2019
($ in millions)
Outstanding
% of Total
Outstanding
% of Total
FICO ≤ 659 $ 450  3   % $ 508   %
FICO 660-719 3,573  28  3,449  30 
FICO ≥ 720 8,902  69  7,581  66 
Total $ 12,925  100   % $ 11,538  100   %

As of September 30, 2020, 94% of the indirect secured consumer loan portfolio is comprised of automobile loans, powersport loans and motorcycle loans. It is a common industry practice to advance on these types of loans an amount in excess of the collateral value due to the inclusion of negative equity trade-in, maintenance/warranty products, taxes, title and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans. The remainder of the indirect secured consumer loan portfolio is comprised of marine and recreational vehicle loans. The Bancorp’s credit policies limit the maximum advance rate on these to 100% of collateral value.

In response to the COVID-19 pandemic, the indirect automobile originations credit underwriting guidelines have been revised. Revisions include lowering maximum advance rates to 110%, raising the minimum FICO score at origination to 650, raising internal score cutoffs and
51


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
tightening capacity to repay standards. Revised credit underwriting guidelines have also been implemented in the marine, recreational vehicle and powersport channels, raising the minimum FICO score at origination and reducing the maximum allowable advance.

The following table provides an analysis of indirect secured consumer portfolio loans outstanding by LTV at origination as of:
TABLE 46: Indirect Secured Consumer Portfolio Loans Outstanding by LTV at Origination
September 30, 2020 December 31, 2019
($ in millions) Outstanding Weighted- Average LTV Outstanding Weighted- Average LTV
LTV ≤ 100% $ 8,560  80.8   % $ 7,420  81.3   %
LTV > 100% 4,365  113.0  4,118  113.4 
Total $ 12,925  92.0   % $ 11,538  93.1   %

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 47: 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
Nine Months Ended
September 30, 2020 $ 4,365  5  10  3  18 
September 30, 2019 3,995  10  26 

Credit card portfolio
The credit card portfolio consists of predominantly prime accounts with 97% of balances existing within the Bancorp’s footprint at both September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, 68% and 67%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

Card origination strategies have also been revised in response to the COVID-19 pandemic. The minimum FICO score at origination was raised to 720 with a qualifying Fifth Third deposit relationship requirement. New customer prospect marketing has also been halted.

The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score at origination as of:
TABLE 48: Credit Card Portfolio Loans Outstanding by FICO Score at Origination
September 30, 2020 December 31, 2019
($ in millions) Outstanding % of Total Outstanding % of Total
FICO ≤ 659 $ 96  5   % $ 107   %
FICO 660-719 695  33  834  33 
FICO ≥ 720 1,296  62  1,591  63 
Total $ 2,087  100   % $ 2,532  100   %

Other consumer portfolio loans
Other consumer portfolio loans are comprised of secured and unsecured loans originated through the Bancorp’s branch network as well as point-of-sale loans originated in connection with third-party financial technology companies. The Bancorp had $229 million in unfunded commitments associated with loans originated in connection with third-party financial technology companies as of September 30, 2020. The Bancorp closely monitors the credit performance of point-of-sale loans which, for the Bancorp, is impacted by the credit loss protection coverage provided by the third-party financial technology companies.

Minimum FICO scores at origination for unsecured loans originated through Fifth Third and third parties have been raised to 720 in response to the COVID-19 pandemic. Additionally, for Fifth Third originated unsecured loans, a qualifying Fifth Third deposit relationship is now required.

52


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 49: Other Consumer Portfolio Loans Outstanding by Product Type
September 30, 2020 December 31, 2019
($ in millions) Outstanding % of Total
Outstanding
% of Total
Unsecured $ 731  26   % $ 783  29  %
Other secured 739  26  530  19 
Point-of-sale 1,386  48  1,410  52 
Total $ 2,856  100   % $ 2,723  100  %

Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial, credit card and certain consumer loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 50. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to the Nonaccrual Loans and Leases section of Note 1 of the Notes to the Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019.

Nonperforming assets were $942 million at September 30, 2020 compared to $687 million at December 31, 2019. At September 30, 2020, $11 million of nonaccrual loans were held for sale, compared to $7 million at December 31, 2019.

Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.84% as of September 30, 2020 compared to 0.62% as of December 31, 2019. Nonaccrual loans and leases secured by real estate were 36% of nonaccrual loans and leases as of September 30, 2020 compared to 35% as of December 31, 2019.

Portfolio commercial nonaccrual loans and leases were $688 million at September 30, 2020, an increase of $291 million from December 31, 2019. Portfolio consumer nonaccrual loans were $203 million at September 30, 2020, a decrease of $18 million from December 31, 2019. Refer to Table 51 for a rollforward of the portfolio nonaccrual loans and leases.

OREO and other repossessed property was $40 million and $62 million at September 30, 2020 and December 31, 2019, respectively. The Bancorp recognized $2 million in losses on the transfer, sale or write-down of OREO properties for both the three months ended September 30, 2020 and 2019, respectively, and $7 million and $5 million in losses on the transfer, sale or write-down of OREO properties for the nine months ended September 30, 2020 and 2019, respectively.

For the three and nine months ended September 30, 2020 approximately $10 million and $27 million, respectively, of interest income would have been recognized if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. For the three and nine months ended September 30, 2019 approximately $9 million and $26 million, respectively, of interest income would have been recognized. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

53


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 50: Summary of Nonperforming Assets and Delinquent Loans and Leases
As of ($ in millions) September 30,
2020
December 31,
2019
Nonaccrual portfolio loans and leases:
Commercial and industrial loans $ 266  118 
Commercial mortgage loans 99  21 
Commercial construction loans  
Commercial leases 16  26 
Residential mortgage loans(a)
30  12 
Home equity 50  55 
Indirect secured consumer loans 8 
Other consumer loans 3 
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans 252  220 
Commercial mortgage loans 55 
Commercial leases  
Residential mortgage loans(a)
39  79 
Home equity 39  39 
Indirect secured consumer loans 8 
Credit card 26  27 
Total nonaccrual portfolio loans and leases(b)
891  618 
OREO and other repossessed property 40  62 
Total nonperforming portfolio loans and leases and OREO 931  680 
Nonaccrual loans held for sale 10  — 
Nonaccrual restructured loans held for sale 1 
Total nonperforming assets $ 942  687 
Total portfolio loans and leases 90 days past due and still accruing
Commercial and industrial loans $ 4  11 
Commercial mortgage loans 26  15 
Commercial leases 2  — 
Residential mortgage loans(a)
67  50 
Home equity 2 
Indirect secured consumer loans 10  10 
Credit card 27  42 
Other consumer loans 1 
Total portfolio loans and leases 90 days past due and still accruing $ 139  130 
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO 0.84  % 0.62 
ALLL as a percent of nonperforming portfolio assets 277  177 
ACL as a percent of nonperforming portfolio assets 296  198 
(a)Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These advances were $249 as of September 30, 2020 and $261 as of December 31, 2019. The Bancorp recognized losses of an immaterial amount and $1 for the three months ended September 30, 2020 and 2019, respectively, and $2 and $1 for the nine months ended September 30, 2020 and 2019, respectively, due to claim denials and curtailments associated with these insured or guaranteed loans.
(b)Includes $25 and $16 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at September 30, 2020 and December 31, 2019, respectively, of which $13 and $11 were restructured nonaccrual government insured commercial loans at September 30, 2020 and December 31, 2019, respectively.

54


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables provide a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:
TABLE 51: Rollforward of Portfolio Nonaccrual Loans and Leases
For the nine months ended September 30, 2020 ($ in millions)
Commercial Residential Mortgage Consumer Total
Balance, beginning of period $ 397  91  130  618 
Transfers to nonaccrual status 648  104  117  869 
Transfers to accrual status (34) (112) (61) (207)
Transfers to held for sale (11)     (11)
Loan paydowns/payoffs (123) (7) (30) (160)
Transfers to OREO   (7)   (7)
Charge-offs (208)   (23) (231)
Draws/other extensions of credit 19    1  20 
Balance, end of period $ 688  69  134  891 

TABLE 52: Rollforward of Portfolio Nonaccrual Loans and Leases
For the nine months ended September 30, 2019 ($ in millions)
Commercial Residential Mortgage Consumer Total
Balance, beginning of period $ 228  22  98  348 
Transfers to nonaccrual status 291  29  119  439 
Acquired nonaccrual loans —  — 
Transfers to accrual status —  (17) (52) (69)
Loan paydowns/payoffs (105) (6) (23) (134)
Transfers to OREO (4) (5) (3) (12)
Charge-offs (87) (1) (28) (116)
Draws/other extensions of credit 18  —  —  18 
Balance, end of period $ 349  22  111  482 

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

At the time of modification, the Bancorp maintains certain consumer loan TDRs (including certain residential mortgage loans, home equity loans and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower are classified as collateral-dependent TDRs and placed on nonaccrual status regardless of the borrower’s payment history or capacity to repay in the future. These loans are returned to accrual status provided there is a sustained payment history of twelve months after bankruptcy and collectability is reasonably assured for all remaining contractual payments. Commercial loans modified as part of a TDR are maintained on accrual status provided there is a sustained payment history of six months or greater prior to the modification in accordance with the modified terms and all remaining contractual payments under the modified terms are reasonably assured of collection. TDRs of commercial loans and credit card loans that do not have a sustained payment history of six months or greater in accordance with the modified terms remain on nonaccrual status until a six-month payment history is sustained. For further information on TDRs, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.

Consumer restructured loans on accrual status totaled $818 million and $965 million at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the percent of restructured residential mortgage loans, home equity loans and credit card loans that were past due 30 days or more from their modified terms were 24%, 20% and 28%, respectively.

55


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following tables summarize portfolio TDRs by loan type and delinquency status:
TABLE 53: Accruing and Nonaccruing Portfolio TDRs
Accruing(d)
30-89 Days 90 Days or
As of September 30, 2020 ($ in millions) Current Past Due More Past Due
Nonaccruing(c)
Total
Commercial loans(a)
$ 123      307  430 
Residential mortgage loans(b)
493  27  91  39  650 
Home equity 179  6    39  224 
Indirect secured consumer loans 4      8  12 
Credit card 16  2    26  44 
Total $ 815  35  91  419  1,360 
(a)Excludes restructured nonaccrual loans held for sale.
(b)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of September 30, 2020, these advances represented $294 of current loans, $24 of 30-89 days past due loans and $69 of 90 days or more past due loans.
(c)Excludes approximately $12 of residential mortgage loans that were modified prior to repurchase.
(d)Excludes approximately $125 of residential mortgage loans that were modified prior to repurchase.
TABLE 54: Accruing and Nonaccruing Portfolio TDRs
Accruing
30-89 Days 90 Days or
As of December 31, 2019 ($ in millions) Current Past Due More Past Due Nonaccruing Total
Commercial loans(a)
$ 23  —  —  231  254 
Residential mortgage loans(b)
552  49  134  79  814 
Home equity 199  —  39  246 
Indirect secured consumer loans —  —  12 
Credit card 14  —  27  44 
Total $ 794  60  134  382  1,370 
(a)Excludes restructured nonaccrual loans held for sale.
(b)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2019, these advances represented $321 of current loans, $40 of 30-89 days past due loans and $109 of 90 days or more past due loans.

Analysis of Net Loan Charge-offs
Net charge-offs were 35 bps and 36 bps of average portfolio loans and leases for the three months ended September 30, 2020 and 2019, respectively, and were 41 bps and 32 bps of average portfolio loans and leases for the nine months ended September 30, 2020 and 2019, respectively. Table 55 provides a summary of credit loss experience and net charge-offs as a percent 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 increased to 33 bps and 35 bps during the three and nine months ended September 30, 2020, respectively, compared to 18 bps and 14 bps during the three and nine months ended September 30, 2019, respectively. The increases for both the three and nine months ended September 30, 2020 were primarily due to increases in net charge-offs on commercial and industrial loans of $13 million and $90 million, respectively, compared to the same periods in the prior year.

The ratio of consumer loan net charge-offs as a percent of average portfolio consumer loans decreased to 40 bps and 53 bps during the three and nine months ended September 30, 2020, respectively, compared to 68 bps and 65 bps during the three and nine months ended September 30, 2019, respectively. The decreases for both the three and nine months ended September 30, 2020 were primarily due to decreases in net charge-offs on indirect secured consumer loans of $10 million and $11 million, respectively, compared to the same periods in the prior year, and decreases in net charge-offs on other consumer loans of $9 million and $10 million, respectively, compared to the same periods in the prior year. The decreases for both the three and nine months ended September 30, 2020 included the impact of government stimulus programs and the Bancorp's hardship programs.
56


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 55: Summary of Credit Loss Experience
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Losses charged off:
Commercial and industrial loans $ (45) (30) (167) (80)
Commercial mortgage loans (11) —  (16) — 
Commercial leases (10) (4) (26) (7)
Residential mortgage loans (1) (2) (6) (5)
Home equity (4) (5) (11) (16)
Indirect secured consumer loans (11) (21) (48) (57)
Credit card (34) (38) (117) (116)
Other consumer loans(a)
(19) (30) (66) (77)
Total losses charged off $ (135) (130) (457) (358)
Recoveries of losses previously charged off:
Commercial and industrial loans $ 3  10  13 
Commercial mortgage loans   —  2 
Commercial leases 2  —  2  — 
Residential mortgage loans 2  5 
Home equity 3  6 
Indirect secured consumer loans 8  25  23 
Credit card 5  17  15 
Other consumer loans(a)
11  13  37  38 
Total recoveries of losses previously charged off $ 34  31  104  102 
Net losses charged off:
Commercial and industrial loans $ (42) (29) (157) (67)
Commercial mortgage loans (11) —  (14)
Commercial leases (8) (4) (24) (7)
Residential mortgage loans 1  (1) (1) (1)
Home equity (1) (2) (5) (8)
Indirect secured consumer loans (3) (13) (23) (34)
Credit card (29) (33) (100) (101)
Other consumer loans (8) (17) (29) (39)
Total net losses charged off $ (101) (99) (353) (256)
Net losses charged off as a percent of average portfolio loans and leases:
Commercial and industrial loans 0.31  % 0.22  0.38  0.18 
Commercial mortgage loans 0.39  (0.01) 0.17  (0.02)
Commercial leases 1.09  0.41  1.05  0.25 
Total commercial loans and leases 0.33  % 0.18  0.35  0.14 
Residential mortgage loans (0.02) 0.03  0.01  0.01 
Home equity 0.07  0.16  0.11  0.18 
Indirect secured consumer loans 0.11  0.50  0.25  0.45 
Credit card 5.44  5.41  5.84  5.59 
Other consumer loans 1.05  2.47  1.36  2.03 
Total consumer loans 0.40  % 0.68  0.53  0.65 
Total net losses charged off as a percent of average portfolio loans and leases 0.35  % 0.36  0.41  0.32 
(a)The Bancorp recorded $9 and $31 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 nine months ended September 30, 2020, respectively, compared to $12 and $35 for the three and nine months ended September 30, 2019, respectively.

Allowance for Credit Losses
The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. As further described in Note 4 of the Notes to Condensed Consolidated Financial Statements, the Bancorp adopted ASU 2016-13 on January 1, 2020 which established a new approach for estimating credit losses on certain types of financial instruments. After adoption of this amended guidance, 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 and reasonably expected TDRs). 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
57


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

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, 2019 for discussion of the accounting policies for the ALLL and reserve for unfunded commitments for periods prior to January 1, 2020.

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 credit card and 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.

Day 1 Adoption Impact
Upon adoption of ASU 2016-13 on January 1, 2020, 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 assigned a probability weighting of 80% with each of the Upside and Downside scenarios being assigned a 10% weighting.

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.

September 30, 2020 ACL
The ACL as of September 30, 2020 was impacted by several factors, including continued weakness in the economic outlook and lower oil prices. As a result of these factors, the Bancorp incorporated a combination of quantitative model-based estimates and qualitative overlays. For the quantitative estimates, the Bancorp incorporated three scenarios developed by the third party in August 2020 that included estimates of the expected impacts of the changes in economic conditions caused by the COVID-19 pandemic. The Baseline scenario was assigned a
58


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
probability weighting of 60%, with a more favorable scenario (Upside) assigned a probability weighting of 20% and a less favorable scenario (Downside) assigned a probability of 20%. The Baseline scenario assumes $1.5 trillion in additional stimulus, which was expected to boost GDP, and in 2021 GDP growth is expected to be at a 2.6% annualized rate. The Baseline scenario also assumes a 9.8% unemployment rate through the third quarter of 2020 with an average annual unemployment rate of 8.8% in 2021. The Upside scenario assumes that the government stimulus quickens a recovery, significantly improving business and consumer confidence. In this scenario, housing prices rise by 3.9% (compared to 1.8% in the Baseline) during 2020. Upside real GDP growth is expected to be 6% in 2021, and a full-employment rate is expected to be achieved by 2023, a year earlier than Baseline. The Downside scenario reflects a double-dip recession, and excludes the impact of a second stimulus package. This scenario shows a decline in annual average GDP through 2021 of 1.9%, an unemployment rate that peaks at 12% during the second quarter of 2021, and housing prices dropping 10% through mid-2021.

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 $1.3 billion. This sensitivity calculation only reflects the impact of changing the probability weighting of the scenarios in the quantitative credit loss models and excludes any additional considerations associated with the qualitative component of the ACL that might be warranted in the circumstance.
TABLE 56: Changes in Allowance for Credit Losses
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions)
2020(b)
2019(c)
2020(b)
2019(c)
ALLL:
Balance, beginning of period $ 2,696  1,115  1,202  1,103 
Impact of adoption of ASU 2016-13   —  643  — 
Losses charged off(a)
(135) (130) (457) (358)
Recoveries of losses previously charged off(a)
34  31  104  102 
Provision for (benefit from) loan and lease losses (21) 127  1,082  296 
Balance, end of period $ 2,574  1,143  2,574  1,143 
Reserve for unfunded commitments:
Balance, beginning of period $ 176  147  144  131 
Impact of adoption of ASU 2016-13   —  10  — 
Reserve for acquired unfunded commitments   —   
Provision for the reserve for unfunded commitments 6  28  15 
Balance, end of period $ 182  154  182  154 
(a)The Bancorp recorded $9 and $31 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 nine months ended September 30, 2020, respectively, compared to $12 and $35 for the three and nine months ended September 30, 2019, respectively.
(b)The ALLL and Reserve for unfunded commitments were calculated under the expected loss methodology upon the adoption of ASU 2016-13 on January 1, 2020.
(c)The ALLL and Reserve for unfunded commitments were calculated under the incurred loss methodology for the three and nine months ended September 30, 2019.

As shown in Table 57, the ALLL as a percent of portfolio loans and leases was 2.32% and 1.10% at September 30, 2020 and December 31, 2019, respectively. Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired company’s ALLL. Prior to the adoption of ASU 2016-13 on January 1, 2020, the Bancorp also did not increase its existing ALLL as part of purchase accounting for acquired loans and leases. The ALLL was $2.6 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively.

59


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
TABLE 57: Attribution of Allowance for Loan and Lease Losses to Portfolio Loans and Leases
As of ($ in millions) September 30,
2020
December 31,
2019
Attributed ALLL:
Commercial and industrial loans $ 1,022  561 
Commercial mortgage loans 373  87 
Commercial construction loans 105  45 
Commercial leases 33  17 
Residential mortgage loans 297  73 
Home equity 211  37 
Indirect secured consumer loans 128  53 
Credit card 285  168 
Other consumer loans 120  40 
Unallocated
N/A
121 
Total ALLL $ 2,574  1,202 
Portfolio loans and leases:
Commercial and industrial loans $ 51,695  50,542 
Commercial mortgage loans 10,878  10,963 
Commercial construction loans 5,656  5,090 
Commercial leases 3,021  3,363 
Residential mortgage loans 16,158  16,724 
Home equity 5,455  6,083 
Indirect secured consumer loans 12,925  11,538 
Credit card 2,087  2,532 
Other consumer loans 2,856  2,723 
Total portfolio loans and leases $ 110,731  109,558 
Attributed ALLL as a percent of respective portfolio loans and leases:
Commercial and industrial loans 1.98   % 1.11 
Commercial mortgage loans 3.43  0.79 
Commercial construction loans 1.86  0.88 
Commercial leases 1.09  0.51 
Residential mortgage loans 1.84  0.44 
Home equity 3.87  0.61 
Indirect secured consumer loans 0.99  0.46 
Credit card 13.66  6.64 
Other consumer loans 4.20  1.47 
Unallocated (as a percent of total portfolio loans and leases)
N/A
0.11 
Total ALLL as a percent of total portfolio loans and leases 2.32   % 1.10 
Total ACL as a percent of total portfolio loans and leases 2.49  1.23 

As previously mentioned, the Bancorp adopted ASU 2016-13 on January 1, 2020. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2020, the Bancorp recorded a combined increase to the ALLL and reserve for unfunded commitments on January 1, 2020 of approximately $653 million upon the adoption of ASU 2016-13. The increase in the ALLL at the date of adoption was primarily attributable to longer duration home equity and residential mortgage loans.

The Bancorp’s ALLL may vary significantly from period to period after the adoption date as it will be based on changes in economic conditions, economic forecasts and the composition and credit quality of the Bancorp’s loan and lease portfolio. The adoption of ASU 2016-13 will also have an impact on the provision for credit losses in periods after adoption, which could differ materially from historical trends. For additional information on ASU 2016-13, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.
60


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 and Wealth and Asset Management lines of business manage price risk for capital markets sales and trading activities related to their respective businesses. The Mortgage 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, is 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. Actual results may differ from simulated results due to timing, magnitude and frequency of interest rate changes, deviations from projected assumptions as well as from changes in market conditions and management strategies.

As of September 30, 2020, the Bancorp’s interest rate risk exposure is governed by a risk framework that utilizes the change in NII over 12-month and 24-month horizons assuming a 200 bps parallel ramped increase in interest rates. Given the unlikely probability associated with a potential negative rate environment, the Bancorp does not have a policy limit for scenarios that include negative rates. Therefore, the Bancorp has no policy limit for a scenario with a decrease in interest rates currently in effect as the Federal Funds target range is currently between zero and 25 basis points. However, the Bancorp routinely analyzes various potential and extreme scenarios, including ramps, shocks and non-parallel shifts in rates, including negative rate scenarios, 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. The ongoing COVID-19 pandemic has caused significant changes to interest rates, volatilities, and the composition of the Bancorp’s balance sheet, including significant increases in deposit funding related to stimulus programs, which has resulted in an excess liquidity position. The excess liquidity is likely to continue to negatively impact net interest income and net interest margin if rates hold steady or move lower, but may be partially offset by the amortization of fees related to PPP loans.

In order to recognize the risk of noninterest-bearing demand deposit balance run-off in a rising interest rate environment, the Bancorp’s NII sensitivity modeling assumes that approximately $750 million of additional demand deposit balances run-off over 24 months above what is included in senior management’s baseline projections for each 100 bps increase in short-term market interest rates. Similarly, the Bancorp’s
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
NII sensitivity modeling incorporates approximately $750 million of incremental growth in noninterest-bearing deposit balances over 24 months above senior management’s baseline projections for each 100 bps decrease in short-term market interest rates. The incremental balance run-off and growth are modeled to flow into and out of funding products that reprice in conjunction with short-term market rate changes.

Another important deposit modeling assumption is the amount by which interest-bearing deposit rates will increase or decrease when market interest rates increase or decrease. This deposit repricing sensitivity is known as the beta, and it represents the expected amount by which Bancorp deposit rates will change for a given change in short-term market rates. The Bancorp’s NII sensitivity modeling assumes a weighted-average rising-rate interest-bearing deposit beta of 71% at September 30, 2020, which is approximately 10 to 30 percentage points higher than the average beta that the Bancorp experienced in the FRB tightening cycles from June 2004 to June 2006 and from December 2015 to December 2018. In the event of further rate cuts by the FRB into negative territory, the Bancorp’s NII sensitivity modeling assumes a weighted-average falling-rate interest-bearing deposit beta of 38% at September 30, 2020 while maintaining that deposit rates themselves will not become negative. In addition, the modeling assumes there is no lag between the timing of changes in market rates and the timing of deposit repricing despite such timing lags having occurred in prior rate cycles.

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

The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of:
TABLE 58: Estimated NII Sensitivity Profile and ALCO Policy Limits
September 30, 2020 September 30, 2019
% 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 3.26   % 10.15  (4.00) (6.00) 0.66  5.05  (4.00) (6.00)
+100 Ramp over 12 months 1.66  5.34  N/A N/A 0.40  2.96  N/A
N/A
-25 Ramp over 3 months (2.28) (3.27) N/A N/A N/A N/A N/A N/A
-100 Ramp over 12 months N/A N/A N/A N/A (3.11) (8.74) (8.00) (12.00)

At September 30, 2020, the Bancorp’s NII would benefit in both year one and year two under the parallel rate ramp increases. The Bancorp maintains an asymmetric NII sensitivity profile, which is attributable to the level of floating-rate assets, including the predominantly floating-rate commercial loan portfolio, exceeding the level of floating-rate liabilities due to the increased amount of deposit rates near zero in this low interest rate environment and other fixed-rate borrowings. Reductions in the yield of the commercial loan portfolio would be expected to be only partially offset by a decline in the cost of interest-bearing deposits in a falling-rate scenario. However, proactive management of the securities and derivatives portfolios has reduced the ongoing near-term risk to declining market rates and provided significant protection from the decline in rates experienced as the COVID-19 pandemic unfolded. The changes in the estimated NII sensitivity profile compared to September 30, 2019 were primarily attributable to the impact of the current near-zero interest rate environment on the previously discussed interest rate profile and the significant increase in noninterest-bearing and low-cost interest-bearing deposits. The down rate scenarios were also impacted by the higher composition of low-cost deposits hitting their floor rates more quickly in the current-year scenarios due to the low-rate environment.

Tables 59 and 60 provide the sensitivity of the Bancorp’s estimated NII profile at September 30, 2020 to changes to certain deposit balance and deposit repricing sensitivity (betas) assumptions.

The following table includes the Bancorp’s estimated NII sensitivity profile at September 30, 2020 with an immediate $1 billion decrease and an immediate $1 billion increase in demand deposit balances:
TABLE 59: Estimated NII Sensitivity Profile at September 30, 2020 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 3.04   % 9.68  3.48  10.61 
+100 Ramp over 12 months 1.55  5.11  1.77  5.58 
-25 Ramp over 3 months (2.33) (3.32) (2.23) (3.21)

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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 a 25% increase and a 25% decrease to the corresponding deposit beta assumptions as of September 30, 2020.
TABLE 60: Estimated NII Sensitivity Profile at September 30, 2020 with Deposit Beta Assumptions Changes
% Change in NII (FTE)
Betas 25% Higher(a)
Betas 25% Lower(b)
Change in Interest Rates (bps) 12
Months
13-24
Months
12
Months
13-24
Months
+200 Ramp over 12 months (0.64) % 3.08  7.16  17.21 
+100 Ramp over 12 months (0.28) 1.84  3.61  8.84 
-25 Ramp over 3 months (2.27) (3.25) (2.30) (3.28)
(a)Includes weighted-average rising-rate and falling-rate interest-bearing deposit betas of 88% and 48%, respectively.
(b)Includes weighted-average rising-rate and falling-rate interest-bearing deposit betas of 53% and 29%, respectively.

Economic Value of Equity Sensitivity
The Bancorp also uses EVE as a measurement tool in managing interest rate risk. Whereas the NII sensitivity analysis highlights the impact on forecasted NII on an FTE basis (non-GAAP) over one- and two-year time horizons, EVE is a point-in-time analysis of the economic sensitivity of current positions that incorporates all cash flows over their estimated remaining lives. The EVE of the balance sheet is defined as the discounted present value of all asset and net derivative cash flows less the discounted value of all liability cash flows. Due to this longer horizon, the sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the balance growth assumptions used in the NII sensitivity analysis. As with the NII simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving loan and security prepayments and the expected balance attrition and pricing of indeterminate-lived deposits.

The following table shows the Bancorp’s estimated EVE sensitivity profile as of:
TABLE 61: Estimated EVE Sensitivity Profile
September 30, 2020 September 30, 2019
Change in Interest Rates (bps) % Change in EVE ALCO
Policy Limit
% Change in EVE ALCO
Policy Limit
+200 Shock (1.48) % (12.00) (3.18) (12.00)
+100 Shock (0.11) N/A (0.10) N/A
-25 Shock (0.97) N/A N/A N/A
-100 Shock
N/A
N/A (3.57) N/A
-175 Shock
N/A
N/A (7.78) (12.00)

The EVE sensitivity is moderately negative in a +200 bps rising-rate scenario at September 30, 2020. The changes in the estimated EVE sensitivity profile from September 30, 2019 were primarily related to the low-rate environment, growth in noninterest-bearing and low-cost interest-bearing deposits and the shorter expected lives of prepayable, fixed-rate assets due to the decrease in market interest rates. These items were partially offset by continued repositioning of the investment portfolio into securities with less principal cash flows in the near term.

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

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

Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates. Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities.
63


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

Tables 62 and 63 show all swap and floor positions that are utilized for purposes of managing the Bancorp’s exposures to the variability of interest rates. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index or to hedge forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The volume, maturity and mix of portfolio swaps change frequently as the Bancorp adjusts its broader interest rate risk management objectives and the balance sheet positions to be hedged. For further information, including the notional amount and fair values of these derivatives, refer to Note 15 of the Notes to 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 62: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments
As of September 30, 2020 ($ in millions) Notional
Amount
Fair
Value
Remaining
(years)
Receive/Strike Rate
Index
Interest rate swaps – cash flow – receive-fixed $ 8,000  (1) 3.3  3.02   % 1 ML
Interest rate swaps – fair value – receive-fixed 1,955  581  8.3  5.35  1 ML / 3ML
Total interest rate swaps $ 9,955  580 

Interest rate floors – cash flow – receive-fixed
$ 3,000  265  4.2  2.25 
1 ML
TABLE 63: Weighted-Average Maturity, Receive Rate and Pay Rate on Qualifying Hedging Instruments
As of December 31, 2019 ($ in millions) Notional Amount Fair Value Remaining (years) Receive/Strike Rate
Index
Interest rate swaps – cash flow – receive-fixed $ 7,000  (2) 3.9  3.00   % 1 ML
Interest rate swaps – cash flow – receive-fixed – forward starting(a)
1,000  —  5.0  3.20  1 ML
Interest rate swaps – fair value – receive-fixed 2,705  393  6.8  4.41  1 ML / 3ML
Total interest rate swaps $ 10,705  391 
Interest rate floors – cash flow – receive-fixed $ 3,000  115  5.0  2.25  1 ML
(a)Forward starting swaps became effective January 2, 2020.

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 credit equivalent exposure on these contracts and counterparty credit approvals performed by independent risk management. For further information, including the notional amount and fair values of these derivatives, refer to Note 15 of the Notes to Condensed Consolidated Financial Statements.

Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both fixed and floating/adjustable-rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of time the rate earned is established.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table summarizes the carrying value of the Bancorp’s portfolio loans and leases expected cash flows, excluding interest receivable, as of September 30, 2020:
TABLE 64: Portfolio Loans and Leases Expected Cash Flows(a)
($ in millions)
Less than 1 Year 1-5 Years Over 5 Years Total
 Commercial and industrial loans $ 24,690  25,991  1,014  51,695 
Commercial mortgage loans 4,030  5,888  960  10,878 
Commercial construction loans 2,855  2,693  108  5,656 
Commercial leases 958  1,452  611  3,021 
Total commercial loans and leases 32,533  36,024  2,693  71,250 
Residential mortgage loans(b)
3,874  7,054  5,230  16,158 
Home equity 1,175  2,835  1,445  5,455 
Indirect secured consumer loans 4,223  7,897  805  12,925 
Credit card 417  1,670  —  2,087 
Other consumer loans 1,552  1,135  169  2,856 
Total consumer loans 11,241  20,591  7,649  39,481 
Total portfolio loans and leases $ 43,774  56,615  10,342  110,731 
(a)Expected cash flows from portfolio loans and leases do not reflect changes in timing due to hardship programs offered in response to the COVID-19 pandemic.
(b)Includes residential mortgage loans previously sold to GNMA for which the Bancorp is deemed to have regained effective control over under ASC Topic 860, but did not exercise its option to repurchase.

The above table does not include the estimated impact of hardship programs on portfolio loan and lease cash flows. The Bancorp currently estimates portfolio loan and lease cash flows to be reduced by $15 million to $20 million over the next 12 months due to these programs. Additionally, the Bancorp expects to fund $125 million to $225 million of servicer advances related to its serviced-for-other mortgages due to the hardship programs over the next six months. These cash flow estimates are based on actual hardship requests to date and estimated hardship requests through the fourth quarter of 2020.

The following table displays a summary of expected cash flows, excluding interest receivable, occurring after one year for both fixed and floating/adjustable-rate loans and leases as of September 30, 2020:
TABLE 65: Portfolio Loans and Leases Expected Cash Flows Occurring After One Year(a)
Interest Rate
($ in millions) Fixed Floating or Adjustable
Commercial and industrial loans
$ 3,358  23,647 
Commercial mortgage loans 1,558  5,290 
Commercial construction loans 43  2,758 
Commercial leases 2,063  — 
Total commercial loans and leases 7,022  31,695 
Residential mortgage loans(b)
9,534  2,750 
Home equity 393  3,887 
Indirect secured consumer loans
8,686  16 
Credit card 303  1,367 
Other consumer loans 1,042  262 
Total consumer loans 19,958  8,282 
Total portfolio loans and leases $ 26,980  39,977 
(a)Expected cash flows from portfolio loans and leases do not reflect changes in timing due to hardship programs offered in response to the COVID-19 pandemic.
(b)Includes residential mortgage loans previously sold to GNMA for which the Bancorp is deemed to have regained effective control over under ASC Topic 860, but did not exercise its option to repurchase.

Residential Mortgage Servicing Rights and Price Risk
The fair value of the residential MSR portfolio was $660 million and $993 million at September 30, 2020 and December 31, 2019, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.

Mortgage rates decreased during both the three and nine months ended September 30, 2020 and 2019, which caused modeled prepayment speeds to rise. Additionally, swap rates increased for the three months ended September 30, 2020, which caused modeled OAS assumptions
65


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
to increase. The fair value of the MSR portfolio increased $4 million and decreased $340 million for the three and nine months ended September 30, 2020, respectively, compared to decreases of $120 million and $294 million for the three and nine months ended September 30, 2019, respectively, due to changes to inputs to the valuation model, including prepayment speeds and OAS assumptions. The fair value of the MSR portfolio decreased $75 million and $179 million for the three and nine months ended September 30, 2020, respectively, compared to $50 million and $122 million for the three and nine months ended September 30, 2019, respectively, due to the impact of contractual principal payments and actual prepayment activity.

The Bancorp recognized net losses of $13 million and net gains of $351 million on its non-qualifying hedging strategy for the three and nine months ended September 30, 2020, respectively, compared to net gains of $130 million and $313 million during the three and nine months ended September 30, 2019, respectively. These amounts included net losses of $1 million and net gains of $3 million for the three and nine months ended September 30, 2020, respectively, compared to net losses of an immaterial amount and net gains of $5 million for the three and nine months ended September 30, 2019 on securities related to the Bancorp’s non-qualifying hedging strategy. The Bancorp may adjust its hedging strategy to reflect its assessment of the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Refer to Note 14 of the Notes to 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 September 30, 2020 and December 31, 2019 was $677 million and $880 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of 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 credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management.

Commodity Risk
The Bancorp also enters into commodity contracts for the benefit of commercial customers to hedge their exposure to commodity price fluctuations. Similar to the hedging of foreign exchange and 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 credit equivalent exposure on these contracts and counterparty credit approvals performed by independent risk management.

66


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 19 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 an Interest Rate and Price Risk Management function as part of ERM that provides independent oversight of liquidity risk management.

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

Table 64 of the Interest Rate and Price Risk Management subsection of the Risk Management section of MD&A illustrates the expected maturities from loan and lease repayments. Of the $37.4 billion of securities in the Bancorp’s available-for-sale debt and other securities portfolio at September 30, 2020, $3.9 billion in principal and interest is expected to be received in the next 12 months and an additional $4.4 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorp’s securities portfolio, refer to the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.

Asset-driven liquidity is provided by the Bancorp’s ability to sell or securitize loans and leases. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as certain other residential mortgage loans, certain commercial loans, home equity loans, automobile loans and other consumer loans are also capable of being securitized or sold. For the three and nine months ended September 30, 2020, the Bancorp sold or securitized loans and leases totaling $2.8 billion and $9.0 billion, respectively, compared to $2.6 billion and $7.0 billion during the three and nine months ended September 30, 2019, respectively. For further information, refer to Note 14 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 87% and 85% of its average total assets for the three and nine months ended September 30, 2020, respectively, compared to 83% for both the three and nine months ended September 30, 2019. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system. Certificates $100,000 and over and certain deposits in the Bancorp’s foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset growth. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.

As of September 30, 2020, $4.7 billion of debt or other securities were available for issuance under the current Bancorp’s Board of Directors’ authorizations and the Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. During the nine months ended September 30, 2020, the Bancorp issued and sold $1.25 billion in aggregate principal amount of senior fixed-rate notes and issued in a registered public offering
67


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
350,000 depositary shares, representing 14,000 shares of 4.50% fixed-rate reset non-cumulative perpetual preferred stock, Series L, for net proceeds of approximately $346 million.

As of September 30, 2020, the Bank’s global bank note program had a borrowing capacity of $25.0 billion, of which $19.1 billion was available for issuance. During the nine months ended September 30, 2020, the Bank issued and sold $1.25 billion in aggregate principal amount of senior fixed-rate notes. Additionally, at September 30, 2020, the Bank had approximately $44.1 billion of borrowing capacity available through secured borrowing sources, including the FRB and FHLB.

Current Liquidity Position
The COVID-19 pandemic has significantly impacted the economic environment and financial markets, including short-term liquidity markets and the debt capital markets. Federal Reserve programs established to support the functioning of markets and provide access to credit have stabilized financial markets. In the third quarter of 2020, the Bancorp experienced additional increases in core deposit funding, while revolving line of credit utilization continued to decline. As a result, the Bancorp maintains a strong liquidity profile driven by strong core deposit funding and over $100 billion in current available liquidity. 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 which allows for the effective management of concentration and rollover risk.

As of September 30, 2020, the Bancorp 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 31 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 66. 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 66: Agency Ratings
As of November 5, 2020 Moody’s Standard and Poor’s Fitch DBRS
 Fifth Third Bancorp:
Short-term borrowings No rating A-2 F1 R-1L
Senior debt Baa1 BBB+ A- A
Subordinated debt Baa1 BBB BBB+ AL
Fifth Third Bank, National Association:
Short-term borrowings P-2 A-2 F1 R-1M
Short-term deposit P-1 No rating F1 No rating
Long-term deposit Aa3 No rating A AH
Senior debt A3 A- A- AH
Subordinated debt Baa1 BBB+ BBB+ A
Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank, National Association Stable Stable Negative Negative



68


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct or adverse external events that are neither market- nor credit-related. Operational risk is inherent in the Bancorp’s activities and can manifest itself in various ways, including fraudulent acts, business interruptions, inappropriate behavior of employees, unintentional failure to comply with applicable laws and regulations, poor design or delivery of products and services, cyber-security or physical security incidents and privacy breaches or failure of third parties to perform in accordance with their arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damage to the Bancorp. The Bancorp’s risk management goal is to keep operational risk at appropriate levels consistent with the Bancorp’s risk appetite, financial strength, the characteristics of its businesses, the markets in which it operates and the competitive and regulatory environment to which it is subject.

To control, monitor and govern operational risk, the Bancorp maintains an overall Risk Management Framework which comprises governance oversight, risk assessment, capital measurement, monitoring and reporting as well as a formal three lines of defense approach. ERM is responsible for prescribing the framework to the lines of business and corporate functions and providing independent oversight of its implementation (second line of defense). Business Controls groups are in place in each of the lines of business to ensure consistent implementation and execution of managing day-to-day operational risk (first line of defense).

The Bancorp’s risk management framework consists of five integrated components, including identifying, assessing, managing, monitoring and independent governance reporting of risk. The corporate Operational Risk Management function within Enterprise Risk is responsible for developing and overseeing the implementation of the Bancorp’s approach to managing operational risk. This includes providing governance, awareness and training, tools, guidance and oversight to support implementation of key risk programs and systems as they relate to operational risk management, such as risk and control self-assessments, new product/initiative risk reviews, key risk indicators, Third-Party Risk Management, cyber-security risk management and review of operational losses. The function is also responsible for developing reports that support the proactive management of operational risk across the enterprise. The lines of business and corporate functions are responsible for managing the operational risks associated with their areas in accordance with the risk management framework. The framework is intended to enable the Bancorp to function with a sound and well-controlled operational environment. These processes support the Bancorp’s goals to minimize future operational losses and strengthen the Bancorp’s performance by maintaining sufficient capital to absorb operational losses that are incurred.

The Bancorp also maintains a robust information security program to support the management of cyber-security risk within the organization with a focus on prevention, detection and recovery processes. Fifth Third utilizes a wide array of techniques to secure its operations and proprietary information such as Board-approved policies and programs, network monitoring and testing, access controls and dedicated security personnel. Fifth Third has adopted the National Institute of Standards and Technology Cybersecurity Framework for the management and deployment of cyber-security controls and is an active participant in the financial sector information sharing organization structure, known as the Financial Services Information Sharing and Analysis Center. To ensure resiliency of key Bancorp functions, Fifth Third also employs redundancy protocols that include a robust business continuity function that works to mitigate any potential impacts to Fifth Third customers and its systems.

Fifth Third also focuses on the reporting and escalation of operational control issues to senior management and the Board of Directors. The Operational Risk Committee is the key committee that oversees and supports Fifth Third in the management of operational risk across the enterprise. The Operational Risk Committee reports to the ERMC, which reports to the Risk and Compliance Joint Committee of the Board of Directors of Fifth Third Bancorp and Fifth Third Bank, National Association.

The COVID-19 pandemic has created heightened operational risks and impacts to the Bancorp, including risks related to new systems and processes to support remote work strategies, new customer hardship programs and functions that cannot be fully executed by outsourced service providers. Additionally, increased external threats have increased fraud and cyber-security risks. These risks continue to be carefully managed and monitored to ensure effective controls are in place, with appropriate oversight and governance by the second line of defense. Fifth Third has a defined pandemic plan and robust business continuity management process, which are being leveraged to support the continuity of processes across the Bank. Fifth Third’s operational risk management team has been actively engaged to oversee and evaluate business changes required to ensure continuity of critical business services with the focus on impacts to customers and Bancorp employees.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
LEGAL AND REGULATORY COMPLIANCE RISK MANAGEMENT
Legal and regulatory compliance risk is the risk of legal or regulatory sanctions, financial loss or damage to reputation as a result of noncompliance with (i) applicable laws, regulations, rules and other regulatory requirements (including but not limited to the risk of consumers experiencing economic loss or other legal harm as a result of noncompliance with consumer protection laws, regulations and requirements); (ii) internal policies and procedures, standards of best practice or codes of conduct; and (iii) principles of integrity and fair dealing applicable to Fifth Third’s activities and functions. Legal risks include the risk of actions against the institution that results in unenforceable contracts, lawsuits, legal sanctions, or adverse judgments, which disrupt or otherwise negatively affect the operations or condition of the institution. Failure to effectively manage such risks can elevate the risk level or manifest itself as other types of key risks, including reputational or operational risk. Fifth Third focuses on managing legal and regulatory compliance risk in accordance with the Bancorp’s integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks. The Bancorp’s risk management goal is to keep compliance risk at appropriate levels, consistent with the Bancorp’s risk appetite.

To mitigate such risks, Compliance Risk Management provides independent oversight to foster consistency and sufficiency in the execution of the program, and ensures that lines of business, regions and support functions are adequately identifying, assessing and monitoring legal and regulatory compliance risks and adopting proper mitigation strategies. Moreover, such strategies are modified from time to time to respond to new or emerging risks in the environment. Compliance Risk Management and the Legal Division provide guidance to the lines of business and enterprise functions, which are ultimately responsible for managing such risks associated with their areas. The Chief Compliance Officer is responsible for formulating and directing the strategy, development, implementation, communication and maintenance of the Compliance Risk Management program, which implements key compliance processes, including but not limited to, executive- and board-level governance and reporting routines, compliance-related policies, risk assessments, key risk indicators, issues tracking, and regulatory compliance testing and monitoring. Compliance Risk Management and the Legal Division partner with the Financial Crimes Division to oversee anti-money laundering processes, and Compliance Risk Management also partners with the Community and Economic Development team to oversee the Bancorp’s compliance with the Community Reinvestment Act.

Fifth Third also reports and escalates legal and regulatory compliance issues to senior management and the Board of Directors. The Management Compliance Committee, which is chaired by the Chief Compliance Officer, is the key committee that oversees and supports Fifth Third in the management of compliance risk across the enterprise. The Management Compliance Committee oversees Fifth Third-wide compliance issues, industry best practices, legislative developments, regulatory concerns and other leading indicators of legal and regulatory compliance risk. The Management Compliance Committee reports to the ERMC, which reports to the Risk and Compliance Joint Committee of the Board of Directors of Fifth Third Bancorp and Fifth Third Bank, National Association.

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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 67: Prescribed Capital Ratios

Minimum

Well-Capitalized
CET1 capital:
Fifth Third Bancorp 4.50   % N/A
Fifth Third Bank, National Association
4.50  6.50 
Tier I risk-based capital:
Fifth Third Bancorp 6.00  6.00 
Fifth Third Bank, National Association
6.00  8.00 
Total risk-based capital:
Fifth Third Bancorp 8.00  10.00 
Fifth Third Bank, National Association
8.00  10.00 
Tier I leverage:
Fifth Third Bancorp 4.00  N/A
Fifth Third Bank, National Association
4.00  5.00 

The Bancorp is currently subject to a capital conservation buffer of 2.5%, in addition to the minimum capital ratios, in order to avoid limitations on certain capital distributions and discretionary bonus payments to executive officers. The Bancorp exceeded these “well-capitalized” and “capital conservation buffer” ratios for all periods presented.

In March 2020, the FRB issued a final rule amending regulatory capital rules, capital plan rules and stress test rules. Under the final rule, the capital conservation buffer is replaced with a stress capital buffer requirement. During each supervisory stress testing cycle, the FRB will use the Bancorp’s supervisory stress test to determine its stress capital buffer, subject to a floor of 2.5%. Similar to the capital conservation buffer, the Bancorp must maintain capital ratios above the sum of its minimum risk-based capital ratios and the stress capital buffer to avoid restrictions on capital distributions and discretionary bonus payments to executive officers. The final rule is applicable to BHCs with $100 billion or more in total consolidated assets and was effective on October 1, 2020.

On June 25, 2020, the FRB provided the Bancorp with an indicative stress capital buffer of 2.5%. The indicative stress capital buffer of 2.5% is the floor under the regulatory capital rules, and without the floor, the Bancorp estimates its buffer would have been approximately 2.1%. The FRB provided the Bancorp a final stress capital buffer requirement of 2.5% on August 7, 2020. The stress capital buffer requirement was effective October 1, 2020.

In April 2018, the federal banking regulators proposed transitional arrangements to permit banking organizations to phase in the day-one impact of the adoption of ASU 2016-13, referred to as CECL, on regulatory capital over a period of three years. The proposed rule was adopted as final effective July 1, 2019. The phase-in provisions of the final rule are optional for a banking organization that experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the banking organization adopts CECL. A banking organization that elects the phase-in provisions of the final rule for regulatory capital purposes must phase in 25% of the transitional amounts impacting regulatory capital in the first year of adoption of CECL, 50% in the second year, 75% in the third year, with full impact beginning in the fourth year.

In March 2020, the banking agencies issued an interim final rule for additional transitional relief to regulatory capital related to the impact of the adoption of CECL given the disruption in economic activity caused by the COVID-19 pandemic. The interim final rule provides banking organizations that adopt CECL in the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by the aforementioned three-year transition period to phase out the aggregate amount of benefit during the initial two-year delay for a total five-year transition. The estimated impact of CECL on regulatory capital (modified CECL transitional amount) is calculated as the sum of the day-one impact on retained earnings upon adoption of CECL (CECL transitional amount) and the calculated change in the ACL relative to the day-one ACL upon adoption of CECL multiplied by a scaling factor of 25%. The scaling factor is used to approximate the difference in the ACL under CECL relative to the incurred loss methodology. The modified CECL transitional amount will be calculated
71


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
each quarter for the first two years of the five-year transition. The amount of the modified CECL transition amount will be fixed as of December 31, 2021 and that amount will be subject to the three-year phase out.

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 impact of the modified CECL transition amount on the Bancorp’s regulatory capital at September 30, 2020 was an increase in capital of approximately $663 million. On a fully phased-in basis, the Bancorp’s CET1 ratio would be reduced by 41 basis points as of September 30, 2020. For additional information on ASU 2016-13, refer to Note 4 of the Notes to Condensed Consolidated Financial Statements.

On July 22, 2019, the federal banking regulators published the Regulatory Capital Simplification final rule in the Federal Register. Under the final rule, non-advanced approach banks, such as the Bancorp, will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences and investments in the capital of unconsolidated financial institutions than those currently applied. The final rule increases the deduction threshold for mortgage servicing assets, certain deferred tax assets arising from temporary differences and investments in the capital of unconsolidated financial institutions from 10% to 25% of CET1, but increases the risk-weighted assets percentage for the non-deducted elements from 100% to 250%. The final rule pertaining to these regulatory capital elements was effective on April 1, 2020.

The following table summarizes the Bancorp’s capital ratios as of:
TABLE 68: Capital Ratios
($ in millions)
September 30,
2020
December 31,
2019
Quarterly average total Bancorp shareholders’ equity as a percent of average assets 11.33   % 12.58 
Tangible equity as a percent of tangible assets(a)(c)(d)
8.09  9.52 
Tangible common equity as a percent of tangible assets(a)(c)(d)
6.99  8.44 
Regulatory capital:
CET1 capital(b)
$ 14,307  13,847 
Tier I capital(b)
16,422  15,616 
Total regulatory capital(b)
21,067  19,661 
Risk-weighted assets
141,083  142,065 
Regulatory capital ratios:(b)
CET1 capital 10.14   % 9.75 
Tier I risk-based capital 11.64  10.99 
Total risk-based capital 14.93  13.84 
Tier I leverage(d)
8.37  9.54 
(a)These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.
(b)Regulatory capital ratios as of September 30, 2020 are calculated pursuant to the five-year transition provision option to phase in the effects of CECL on regulatory capital.
(c)Excludes AOCI.
(d)The decrease in these capital ratios is primarily attributable to the Bancorp's growth of assets during the nine months ended September 30, 2020.

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.

On October 10, 2019, the Federal Reserve Board adopted final rules to tailor certain prudential standards for large domestic and foreign banking organizations. Under the newly adopted tailoring rules, the Bancorp is subject to category IV standards, under which the Bancorp is no longer required to conduct and publicly report company-run stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. As an institution subject to category IV standards, the Bancorp is subject to the FRB’s supervisory stress tests on a biennial basis, the Board capital plan rule and FR Y-14 reporting requirements. 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. As noted above, the Bancorp remains subject to the Board’s capital plan rule, and its requirement to develop and maintain a capital plan, and the Board of Directors of the Bancorp must review and approve the capital plan.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
On March 4, 2020, the Bancorp was informed by the FRB that the deadline to submit the required information related to its capital plan within the FR Y-14A was extended until April 5, 2021, with the exception of the information contained in Schedule C – Regulatory Capital Instruments. The information contained in Schedule C remained due on or before April 6, 2020, which the Bancorp submitted as required.

In June 2019, the Bancorp announced its capital distribution capacity of approximately $2 billion for the period of July 1, 2019 through June 30, 2020. This included the ability to execute share repurchases up to $1.24 billion as well as increase quarterly common stock dividends by up to $0.03 per share. These distributions were governed under the FRB’s 2019 extended stress test process for BHCs with less than $250 billion of total consolidated assets. On March 16, 2020, the Bancorp announced it was temporarily suspending share repurchases that it had capacity to execute under the 2019 CCAR plan. The decision on share repurchases is consistent with Fifth Third’s objective to use the Bancorp’s capital and liquidity to provide support to individuals, businesses and the broader economy through lending and other important services. Fifth Third did not execute any open market or accelerated share repurchases in the first, second and third quarters of 2020.

In June 2020, the FRB took several actions in connection with its announcement of stress test results in light of the uncertainty caused by the COVID-19 pandemic. Specifically, for the third quarter of 2020, the FRB required large banking organizations, including the Bancorp, to suspend share repurchases, cap dividend payments to the amount paid during the second quarter of 2020, and further limit dividends according to a formula based on recent income. The FRB also required large banking organizations, including the Bancorp, to reevaluate their longer-term capital plans, and such organizations will be required to update and resubmit their capital plans later this year to reflect current stresses caused by the COVID-19 pandemic. The FRB may conduct additional analysis each quarter to determine if adjustments to this response are appropriate.

In September 2020, the Bancorp was informed by the FRB that the capital plan resubmission due date was November 2, 2020, which the Bancorp submitted, as required. Additionally, on September 30, 2020 the FRB extended the third quarter of 2020 restrictions on share repurchases and dividends to the fourth quarter of 2020, and dividends remain limited according to a formula based on recent income.

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 $0.27 and $0.24 for the three months ended September 30, 2020 and 2019, respectively, and $0.81 and $0.70 for the nine months ended September 30, 2020 and 2019, respectively.

The following table summarizes the monthly share repurchase activity for the three months ended September 30, 2020:
TABLE 69: 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
July 1, 2020 - July 31, 2020 31,992 $ 18.65  —  76,437,348
August 1, 2020 - August 31, 2020 54,501 20.15  —  76,437,348
September 1, 2020 - September 30, 2020 8,161 21.64  —  76,437,348
Total 94,654 $ 19.77  —  76,437,348
(a)    Shares repurchased during the third quarter of 2020 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.

73


Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial transactions that are considered off-balance sheet arrangements as they involve varying elements of interest rate, price, credit and liquidity risk in excess of the amounts recognized in the Bancorp’s Condensed Consolidated Balance Sheets. The Bancorp’s off-balance sheet arrangements include commitments, contingent liabilities, guarantees, and transactions with non-consolidated VIEs. A brief discussion of these transactions is as follows:

Commitments
The Bancorp has certain commitments to make future payments under contracts, including commitments to extend credit, forward contracts related to residential mortgage loans held for sale, letters of credit, purchase obligations, capital commitments for private equity investments and capital expenditures. Refer to Note 19 of the Notes to Condensed Consolidated Financial Statements for additional information on commitments.

Contingent Liabilities and Guarantees
The Bancorp has performance obligations upon the occurrence of certain events provided in certain contractual arrangements, including residential mortgage loans sold with representation and warranty provisions. Refer to Note 19 of the Notes to Condensed Consolidated Financial Statements for additional information on contingent liabilities and guarantees.

Transactions with Non-consolidated VIEs
The Bancorp engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The investments in those entities in which the Bancorp was determined not to be the primary beneficiary but holds a variable interest in the entity are accounted for under the equity method of accounting or other accounting standards as appropriate and not consolidated. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for additional information on non-consolidated VIEs.

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Table of Contents
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.

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.

As part of the adoption of ASU 2016-13, the Bancorp implemented internal controls to ensure compliance with the revised accounting and disclosure requirements. 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, other than as noted above, there has been no such change during the period covered by this report.
75

Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (Item 1)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
As of
September 30, December 31,
($ in millions, except share data) 2020 2019
Assets
Cash and due from banks $ 2,996  3,278 
Other short-term investments(a)
31,285  1,950 
Available-for-sale debt and other securities(b)
37,425  36,028 
Held-to-maturity securities(c)
15  17 
Trading debt securities 704  297 
Equity securities 277  564 
Loans and leases held for sale(d)
2,323  1,400 
Portfolio loans and leases(a)(e)
110,731  109,558 
Allowance for loan and lease losses(a)
(2,574) (1,202)
Portfolio loans and leases, net 108,157  108,356 
Bank premises and equipment(f)
2,090  1,995 
Operating lease equipment 818  848 
Goodwill 4,261  4,252 
Intangible assets 157  201 
Servicing rights 660  993 
Other assets(a)
10,828  9,190 
Total Assets $ 201,996  169,369 
Liabilities
Deposits:
Noninterest-bearing deposits $ 51,896  35,968 
Interest-bearing deposits 104,787  91,094 
Total deposits 156,683  127,062 
Federal funds purchased 251  260 
Other short-term borrowings 1,196  1,011 
Accrued taxes, interest and expenses 2,500  2,441 
Other liabilities(a)
3,292  2,422 
Long-term debt(a)
15,123  14,970 
Total Liabilities $ 179,045  148,166 
Equity
Common stock(g)
$ 2,051  2,051 
Preferred stock(h)
2,116  1,770 
Capital surplus 3,624  3,599 
Retained earnings 18,010  18,315 
Accumulated other comprehensive income 2,831  1,192 
Treasury stock(g)
(5,681) (5,724)
Total Equity $ 22,951  21,203 
Total Liabilities and Equity $ 201,996  169,369 
(a)Includes $61 and $74 of other short-term investments, $887 and $1,354 of portfolio loans and leases, $(9) and $(7) of ALLL, $5 and $8 of other assets, $2 and $2 of other liabilities, and $786 and $1,253 of long-term debt from consolidated VIEs that are included in their respective captions above at September 30, 2020 and December 31, 2019, respectively. For further information refer to Note 13.
(b)Amortized cost of $34,693 and $34,966 at September 30, 2020 and December 31, 2019, respectively.
(c)Fair value of $15 and $17 at September 30, 2020 and December 31, 2019, respectively.
(d)Includes $1,472 and $1,264 of residential mortgage loans held for sale measured at fair value at September 30, 2020 and December 31, 2019, respectively.
(e)Includes $174 and $183 of residential mortgage loans measured at fair value at September 30, 2020 and December 31, 2019, respectively.
(f)Includes $45 and $27 of bank premises and equipment held for sale at September 30, 2020 and December 31, 2019, respectively.
(g)Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding at September 30, 2020 – 712,327,748 (excludes 211,564,833 treasury shares), December 31, 2019 – 708,915,629 (excludes 214,976,952 treasury shares).
(h)500,000 shares of no par value preferred stock were authorized at both September 30, 2020 and December 31, 2019. There were 422,000 and 436,000 unissued shares of undesignated no par value preferred stock at September 30, 2020 and December 31, 2019, respectively. 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 September 30, 2020 and December 31, 2019. There were 300,000 unissued shares of undesignated no par value Class B preferred stock at both September 30, 2020 and December 31, 2019. 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
September 30,
For the nine months ended
September 30,
($ in millions, except share data) 2020 2019 2020 2019
Interest Income
Interest and fees on loans and leases $ 1,047  1,320  3,397  3,799 
Interest on securities 274  291  840  862 
Interest on other short-term investments 8  14  20  33 
Total interest income 1,329  1,625  4,257  4,694 
Interest Expense
Interest on deposits 46  243  295  692 
Interest on federal funds purchased   2  23 
Interest on other short-term borrowings 5  13  23 
Interest on long-term debt 108  128  347  387 
Total interest expense 159  383  657  1,125 
Net Interest Income 1,170  1,242  3,600  3,569 
Provision for (benefit from) credit losses (15) 134  1,110  310 
Net Interest Income After Provision for (Benefit from) Credit Losses 1,185  1,108  2,490  3,259 
Noninterest Income(a)
Service charges on deposits 144  143  414  417 
Wealth and asset management revenue 132  124  387  358 
Commercial banking revenue 125  123  387  333 
Mortgage banking net revenue 76  95  295  214 
Card and processing revenue 92  94  260  266 
Leasing business revenue 77  92  207  199 
Other noninterest income 26  64  42  679 
Securities gains, net 51  48  30 
Securities gains (losses), net non-qualifying hedges on mortgage servicing rights
(1) —  3 
Total noninterest income 722  740  2,043  2,501 
Noninterest Expense(a)
Compensation and benefits 637  584  1,911  1,843 
Technology and communications 89  100  272  319 
Net occupancy expense 90  84  254  248 
Leasing business expense 35  40  103  97 
Equipment expense 33  33  97  96 
Card and processing expense 29  33  89  98 
Marketing expense 23  40  74  117 
Other noninterest expense 225  245  682  681 
Total noninterest expense 1,161  1,159  3,482  3,499 
Income Before Income Taxes 746  689  1,051  2,261 
Applicable income tax expense 165  140  228  483 
Net Income 581  549  823  1,778 
Dividends on preferred stock 19  19  69  60 
Net Income Available to Common Shareholders $ 562  530  754  1,718 
Earnings per share - basic $ 0.78  0.72  1.05  2.40 
Earnings per share - diluted $ 0.78  0.71  1.04  2.37 
Average common shares outstanding - basic 715,102,136  726,715,542  714,477,089  708,848,535 
Average common shares outstanding - diluted 718,893,892  736,086,399  718,942,648  718,413,237 
(a)During the first quarter of 2020, certain noninterest income and noninterest expense line items were reclassified to better align disclosures to business activities. These reclassifications were retrospectively applied to all prior periods presented. Total noninterest income and noninterest expense did not change as a result of these reclassifications.

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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Net Income $ 581  549  823  1,778 
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains (losses) arising during period (32) 379  1,306  1,387 
Reclassification adjustment for net gains included in net income (34) (2) (34) (2)
Unrealized gains on cash flow hedge derivatives:
Unrealized holding gains arising during period 1  83  494  361 
Reclassification adjustment for net gains included in net income (56) (4) (130) (2)
Defined benefit pension plans, net:
Net actuarial loss arising during the year (2) —  (2) — 
Reclassification of amounts to net periodic benefit costs 3  5 
Other comprehensive income (loss), net of tax (120) 457  1,639  1,747 
Comprehensive Income $ 461  1,006  2,462  3,525 

Refer to the Notes to Condensed Consolidated Financial Statements.
78

Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
Bancorp Shareholders’ Equity
($ in millions, except per share data) Common
Stock
Preferred
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Bancorp
Shareholders
Equity
Non-
Controlling
Interests
Total
Equity
Balance at June 30, 2019 $ 2,051  1,331  3,572  17,431  1,178  (5,089) 20,474  197  20,671 
Net income 549  549 

549 
Other comprehensive income, net of tax 457  457  457 
Cash dividends declared:
Common stock ($0.24 per share)
(175) (175) (175)
Preferred stock:
     Series I ($414.06 per share)
(8) (8) (8)
     Series J ($612.50 per share)
(7) (7) (7)
     Class B, Series A ($5.83 per share)
(1) (1) (1)
     Other(a) ($15.00 per share)
(3) (3) (3)
Shares acquired for treasury (350) (350) (350)
Issuance of preferred stock 242  242  242 
Conversion of outstanding preferred stock issued by a Bancorp subsidiary 197  197  (197) — 
Impact of stock transactions under stock compensation plans, net
17  24  24 
Other
Balance at September 30, 2019 $ 2,051  1,770  3,589  17,786  1,635  (5,427) 21,404  —  21,404 

Balance at June 30, 2020 $ 2,051  1,770  3,603  17,643  2,951  (5,683) 22,335    22,335 
Net income 581  581  581 
Other comprehensive loss, net of tax (120) (120) (120)
Cash dividends declared:
Common stock ($0.27 per share)
(195) (195) (195)
Preferred stock:
     Series I ($414.06 per share)
(7) (7) (7)
     Series J ($219.65 per share)
(3) (3) (3)
     Series K ($309.38 per share)
(3) (3) (3)
     Series L ($187.50 per share)
(3) (3) (3)
     Class B, Series A ($15.00 per share)
(3) (3) (3)
Issuance of preferred stock 346  346  346 
Impact of stock transactions under stock compensation plans, net
21  2  23  23 
Balance at September 30, 2020 $ 2,051  2,116  3,624  18,010  2,831  (5,681) 22,951    22,951 
(a)Dividends declared for Perpetual Preferred Stock, Series C, of MB Financial, Inc., a subsidiary of the Bancorp.

Refer to the Notes to Condensed Consolidated Financial Statements.

79

Fifth Third Bancorp and Subsidiaries
Condensed Consolidated Financial Statements and Notes (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)
Bancorp Shareholders’ Equity
($ in millions, except per share data) Common
Stock
Preferred
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Bancorp
Shareholders
Equity
Non-
Controlling
Interests
Total
Equity
Balance at December 31, 2018 $ 2,051  1,331  2,873  16,578  (112) (6,471) 16,250  —  16,250 
Impact of cumulative effect of change in accounting principle
10  10  10 
Balance at January 1, 2019 $ 2,051  1,331  2,873  16,588  (112) (6,471) 16,260  —  16,260 
Net income 1,778  1,778  1,778 
Other comprehensive income, net of tax 1,747  1,747  1,747 
Cash dividends declared:
Common stock ($0.70 per share)
(518) (518) (518)
Preferred stock:
     Series H ($637.50 per share)
(15) (15) (15)
     Series I ($1,242.18 per share)
(23) (23) (23)
     Series J ($1,225.00 per share)
(15) (15) (15)
     Class B, Series A ($5.83 per share)
(1) (1) (1)
     Other(a) ($30.00 per share)
(6) (6) (6)
Shares acquired for treasury (1,463) (1,463) (1,463)
Issuance of preferred stock 242  242  242 
Conversion of outstanding preferred stock issued by a Bancorp subsidiary 197  197  (197) — 
Impact of MB Financial, Inc. acquisition 712  2,447  3,159  197  3,356 
Impact of stock transactions under stock compensation plans, net
53  59  59 
Other (1) (3)
Balance at September 30, 2019 $ 2,051  1,770  3,589  17,786  1,635  (5,427) 21,404  —  21,404 

Balance at December 31, 2019 $ 2,051  1,770  3,599  18,315  1,192  (5,724) 21,203    21,203 
Impact of cumulative effect of change in accounting principle(b)
(472) (472) (472)
Balance at January 1, 2020 $ 2,051  1,770  3,599  17,843  1,192  (5,724) 20,731    20,731 
Net income 823  823  823 
Other comprehensive income, net of tax 1,639  1,639  1,639 
Cash dividends declared:
Common stock ($0.81 per share)
(585) (585) (585)
Preferred stock:
     Series H ($637.50 per share)
(15) (15) (15)
     Series I ($1,242.18 per share)
(23) (23) (23)
     Series J ($829.58 per share)
(10) (10) (10)
     Series K ($928.14 per share)
(9) (9) (9)
     Series L ($187.50 per share)
(3) (3) (3)
     Class B, Series A ($45.00 per share)
(9) (9) (9)
Issuance of preferred stock 346  346  346 
Impact of stock transactions under stock compensation plans, net
25  41  66  66 
Other (2) 2     
Balance at September 30, 2020 $ 2,051  2,116  3,624  18,010  2,831  (5,681) 22,951    22,951 
(a)Dividends declared for Perpetual Preferred Stock, Series C, of MB Financial, Inc., a subsidiary of the Bancorp.
(b)Related to the adoption of ASU 2016-13 as of January 1, 2020. Refer to Note 4 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 nine months ended
September 30,
($ in millions) 2020 2019
Operating Activities
Net income $ 823  1,778 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 1,110  310 
Depreciation, amortization and accretion 358  289 
Stock-based compensation expense 100  109 
Benefit from deferred income taxes (174) (197)
Securities gains, net (58) (35)
MSR fair value adjustment 519  416 
Net gains on sales of loans and fair value adjustments on loans held for sale (206) (96)
Net losses on disposition and impairment of bank premises and equipment 26  24 
Net gains on disposition and impairment of operating lease equipment (6) (2)
Gain on sale of Worldpay, Inc. shares   (562)
Proceeds from sales of loans held for sale 9,149  5,457 
Loans originated or purchased for sale, net of repayments (9,252) (6,032)
Dividends representing return on equity investments 8  40 
Net change in:
Equity and trading debt securities (107) 66 
Other assets (444) (714)
Accrued taxes, interest and expenses and other liabilities 169  (406)
Net Cash Provided by Operating Activities 2,015  445 
Investing Activities
Proceeds from sales:
AFS securities and other investments 1,325  8,424 
Loans and leases 77  221 
Bank premises and equipment 16  35 
Proceeds from repayments / maturities of AFS and HTM securities and other investments 2,275  1,623 
Purchases:
AFS securities and other investments (3,568) (11,204)
Bank premises and equipment (235) (180)
MSRs (36) (26)
Proceeds from settlement of BOLI 16  21 
Proceeds from sales and dividends representing return of equity investments 12  1,028 
Net cash received on acquisition   1,210 
Net change in:
Other short-term investments and federal funds sold (29,335) (1,322)
Portfolio loans and leases (2,079) (1,132)
Operating lease equipment (61) (25)
Net Cash Used in Investing Activities (31,593) (1,327)
Financing Activities
Net change in deposits 29,621  2,027 
Net change in other short-term borrowings and federal funds purchased 126  2,157 
Dividends paid on common and preferred stock (629) (546)
Proceeds from issuance of long-term debt 2,529  3,103 
Repayment of long-term debt (2,654) (4,012)
Repurchases of treasury stock and related forward contract   (1,463)
Issuance of preferred stock 346  242 
Other (43) (46)
Net Cash Provided by Financing Activities 29,296  1,462 
(Decrease) Increase in Cash and Due from Banks (282) 580 
Cash and Due from Banks at Beginning of Period 3,278  2,681 
Cash and Due from Banks at End of Period $ 2,996  3,261 
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 impairment recorded, if any, 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 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 nine months ended September 30, 2020 and 2019 and the cash flows for the nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2019 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.

Reclassifications
Certain prior period data has been reclassified to conform to current period presentation. Specifically, effective January 1, 2020, Fifth Third reclassified certain noninterest income and noninterest expense line items to better align disclosures to business activities. These reclassifications were retrospectively applied to all prior periods presented. Total noninterest income and noninterest expense did not change as a result of these reclassifications.

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 nine months ended September 30:
($ in millions) 2020 2019
Cash Payments:
Interest $ 746  1,166 
Income taxes 419  524 
Transfers:
Portfolio loans and leases to loans and leases held for sale(a)
$ 713  191 
Loans and leases held for sale to portfolio loans and leases 39  30 
Portfolio loans and leases to OREO 11  23 
Loans and leases held for sale to OREO 2  — 
Supplemental Disclosures:
Additions to lease liabilities under operating leases
$ 41  43 
Additions to lease liabilities under finance leases
93  13 
Right-of-use assets recognized at adoption of ASU 2016-02   509 
Conversion of outstanding preferred stock issued by a Bancorp subsidiary   197 
(a)Includes $668 of residential mortgage loans previously sold to GNMA which the Bancorp was initially deemed to have regained effective control over under ASC Topic 860 and which were recorded as portfolio loans. The Bancorp subsequently repurchased these loans and classified them as held for sale.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
3. Business Combination
On March 22, 2019, Fifth Third Bancorp completed its acquisition of MB Financial, Inc. in a stock and cash transaction valued at approximately $3.6 billion. MB Financial, Inc. was headquartered in Chicago, Illinois with reported assets of approximately $20 billion and 86 branches (91 locations) as of December 31, 2018 and was the holding company of MB Financial Bank, N.A. The acquisition resulted in a combined company with a larger Chicago market presence and core deposit funding base while also building scale in a strategically important market.

Under the terms of the agreement, the Bancorp acquired 100% of the common stock of MB Financial, Inc. In exchange, common shareholders of MB Financial, Inc. received 1.45 shares of Fifth Third Bancorp common stock and $5.54 in cash for each share of MB Financial, Inc. common stock, for a total value per share of $42.49, based on the $25.48 closing price of Fifth Third Bancorp’s common stock on March 21, 2019. Upon closing of the transaction, MB Financial, Inc. became a subsidiary of the Bancorp. However, MB Financial, Inc.’s 6.00% non-cumulative Series C perpetual preferred stock with a fair value of $197 million remained outstanding and was recognized as a noncontrolling interest on the Condensed Consolidated Balance Sheets. Through its ownership of all of the common stock, the Bancorp controlled 95% of the voting equity interests in MB Financial, Inc. with the remainder attributable to the preferred shareholders’ noncontrolling interest.

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

On August 26, 2019, the Bancorp issued 200,000 shares of 6.00% non-cumulative Class B perpetual preferred stock, Series A. Each preferred share has a $1,000 liquidation preference. These shares were issued to the holders of MB Financial, Inc.’s 6.00% non-cumulative Series C perpetual preferred stock in conjunction with the merger of MB Financial, Inc. with and into Fifth Third Bancorp. This transaction resulted in the elimination of the noncontrolling interest in MB Financial, Inc. which was previously reported in the Bancorp’s Condensed Consolidated Financial Statements. The newly issued shares of Class B preferred stock, Series A were recognized by the Bancorp at the carrying value previously assigned to the MB Financial, Inc. Series C preferred stock prior to the transaction.

The acquisition of MB Financial, Inc. constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the acquisition date. These fair value estimates were final as of March 31, 2020.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table reflects consideration paid and the noncontrolling interest recognized for MB Financial, Inc.’s net assets and the amounts of acquired identifiable assets and liabilities assumed at their fair value as of the acquisition date:
($ in millions)
Consideration paid
Cash payments $ 469 
Fair value of common stock issued 3,121 
Stock-based awards 38 
Dividend receivable from MB Financial, Inc. (20)
Total consideration paid $ 3,608 
Fair value of noncontrolling interest in acquiree $ 197 
Net Identifiable Assets Acquired, at Fair Value:
Assets
Cash and due from banks $ 1,679 
Federal funds sold 35 
Other short-term investments 53 
Available-for-sale debt and other securities 832 
Held-to-maturity securities
Equity securities 51 
Loans and leases held for sale 12 
Portfolio loans and leases 13,414 
(a)
Bank premises and equipment 266 
(a)
Operating lease equipment 394 
(a)
Intangible assets 219 
(a)
Servicing rights 263 
Other assets 750 
(a)
Total assets acquired $ 17,972 
Liabilities
Deposits $ 14,489 
Other short-term borrowings 267 
(a)
Accrued taxes, interest and expenses 276 
(a)
Other liabilities 194 
(a)
Long-term debt 727 
(a)
Total liabilities assumed $ 15,953 
Net identifiable assets acquired 2,019 
Goodwill $ 1,786 
(a)Fair values have been updated from the preliminary estimates reported in the March 31, 2019 Form 10-Q.
    
In connection with the acquisition, the Bancorp recognized approximately $1.8 billion of goodwill, of which $15 million relates to 15-year tax deductible goodwill from MB Financial, Inc.’s prior acquisitions. See Note 11 for further information on goodwill recognized and Note 12 for further information on intangible assets acquired in the acquisition of MB Financial, Inc.

The following is a description of the methods used to determine the estimated fair values of significant assets and liabilities presented above.

Cash and due from banks and other short-term investments
For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value.

Available-for-sale debt and other securities, held-to-maturity securities and equity securities
Fair values for securities were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs, including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value was estimated based on pricing models and/or DCF methodologies.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Loans and leases held for sale and portfolio loans and leases
Fair values for loans were based on a DCF methodology that considered factors including the type of loan and related collateral, fixed or variable interest rate, remaining term, credit quality ratings or scores, amortization status and current discount rates. Loans with similar characteristics were pooled together when applying various valuation techniques. The discount rates used for loans were based on an evaluation of current market rates for new originations of comparable loans and a market participant’s required rate of return to purchase similar assets, including adjustments for liquidity and credit quality when necessary. For PCI loans (now PCD loans effective January 1, 2020 upon the adoption of ASU 2016-13), the DCF methodology was based on the Bancorp’s estimate of contractual cash flows expected to be collected.

Bank premises and equipment
Fair values for bank premises and equipment were generally based on appraisals of the property values.

Operating lease equipment
Fair values for operating lease equipment were generally developed using the cost approach. The seller’s historical cost was adjusted by cost trend indices relevant to the asset type and vintage to arrive at a current reproduction cost. This reproduction cost was then adjusted for deterioration based on the age and typical life of each class of assets. Residual values were estimated based on analysis of the seller’s historical trends of residual value realization by asset class.

Intangible assets
The core deposit intangible asset represents the value of relationships with deposit customers. The fair value was estimated based on a DCF methodology that considered expected customer attrition rates, net maintenance cost of the deposit base, alternative cost of funds and the interest costs associated with customer deposits. The core deposit intangible is being amortized on an accelerated basis over its estimated useful life.

For acquired operating leases where the Bancorp is the lessor, intangible assets are recognized when contract terms of the lease are more favorable than market terms as of the acquisition date. Operating lease intangibles are amortized on a straight-line basis over the remaining lease term.

Servicing rights
Fair values for servicing rights were estimated using internal option-adjusted spread models with certain unobservable inputs, primarily prepayment speed assumptions, option-adjusted spread and weighted-average lives.

Other assets
Fair values for ROU assets associated with real estate operating leases were based on current market rental rates for similar properties in the same area, discounted at the Bancorp’s incremental borrowing rates as of the acquisition date. Estimates of current market rental rates were generally based on third-party market rent studies performed for each significant property.

Deposits
The fair values for time deposits were estimated using a DCF methodology whereby the contractual remaining cash flows were discounted using market rates currently being offered for time deposits of similar maturities. For transactional deposits, carrying amounts approximate fair value.

Long-term debt
The fair values of long-term debt instruments were estimated based on quoted market prices for identical or similar instruments, if available, or by using DCF analyses based on current incremental borrowing rates for similar types of instruments.

Merger-Related Expenses
Direct merger-related expenses related to the acquisition of MB Financial, Inc. were expensed as incurred by the Bancorp and were immaterial and $28 million for the three months ended September 30, 2020 and 2019, respectively, and $16 million and $213 million for the nine months ended September 30, 2020 and 2019, respectively.








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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table provides a summary of merger-related expenses recorded in noninterest expense:
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Compensation and benefits $   14  4  88 
Technology and communications   6  68 
Net occupancy expense   4  10 
Equipment expense   —   
Card and processing expense   —   
Marketing expense   —   
Other noninterest expense   2  38 
Total $   28  16  213 

Pro Forma Information
The following table presents unaudited pro forma information as if the acquisition of MB Financial, Inc. had occurred on January 1, 2018. This pro forma information combines the historical condensed consolidated results of operations of Fifth Third Bancorp and MB Financial, Inc. after giving effect to certain adjustments, including purchase accounting fair value adjustments, amortization of intangibles, stock-based compensation expense and acquisition costs, as well as the related income tax effects of those adjustments. The pro forma results also reflect reclassification adjustments to noninterest income and noninterest expense to conform MB Financial, Inc.’s presentation of operating lease income and the related depreciation expense with the Bancorp’s presentation. Direct costs associated with the acquisition were included in pro forma earnings as of January 1, 2018.

The pro forma information does not necessarily reflect the results of operations that would have occurred had Fifth Third Bancorp acquired MB Financial, Inc. on January 1, 2018. Furthermore, cost savings and other business synergies related to the acquisition are not reflected in the unaudited pro forma amounts.
Unaudited Pro Forma Information
($ in millions) For the three months ended September 30, 2019 For the nine months ended September 30, 2019
Net interest income $ 1,223  3,696 
Noninterest income 739  2,601 
Net income available to common shareholders 520  1,840 

Acquired Loans and Leases
Prior to the adoption of ASU 2016-13 on January 1, 2020, purchased loans were evaluated for evidence of credit deterioration at acquisition and recorded at their initial fair value. Generally, the fair value discount or premium on acquired loans and leases was amortized over the contractual life of the loan as an adjustment to yield. For loans acquired with evidence of credit impairment (PCI loans), the Bancorp determined at the acquisition date the excess of the loan’s contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans was accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). This method of accounting for loans acquired with credit impairment did not apply to loans carried at fair value, residential mortgage loans held for sale and loans under revolving credit agreements. 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, 2019 for additional information on the accounting for PCI loans. The Bancorp elected to account for loans acquired from MB Financial, Inc., which were not considered impaired but exhibited evidence of credit deterioration since origination, in the same manner as PCI loans.

The following table reflects the contractually required payments receivable, cash flows expected to be collected and estimated fair value of loans identified as PCI loans on the acquisition date of MB Financial, Inc. These fair value estimates were final as of March 31, 2020.
($ in millions) March 22,
2019
Contractually required payments including interest $ 1,139 
Less: Nonaccretable difference 81 
Cash flows expected to be collected 1,058 
Less: Accretable yield 202 
Fair value of loans acquired $ 856 

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
A summary of activity related to the accretable yield is as follows:
($ in millions) Accretable Yield
Balance as of December 31, 2018 $ — 
Additions 202 
Accretion (30)
Reclassifications from (to) nonaccretable difference (2)
Balance as of September 30, 2019 $ 170 

At the MB Financial, Inc. acquisition date, contractual balances on the purchased non-PCI loans and leases totaled $12.7 billion with a corresponding fair value of $12.5 billion.

ASU 2016-13, which was adopted by the Bancorp on January 1, 2020, superseded the accounting for PCI loans and transitioned to the accounting for PCD loans. As such, the Bancorp no longer recognizes a nonaccretable difference or accretable yield, but instead includes expected credit losses on loans acquired with evidence of credit deterioration as part of the ALLL and amortizes any remaining noncredit discount over the remaining contractual life of the loan as an adjustment to yield. Upon adoption, the Bancorp increased the ALLL by $33 million to reflect expected credit losses on loans previously designated as PCI loans. This amount was added to the amortized cost basis of the loans at transition. After this adjustment, the remaining difference between the amortized cost basis and unpaid principal balance is considered to be a noncredit discount. The noncredit discount totaled $87 million as of January 1, 2020. Refer to Note 4 for additional information about ASU 2016-13 and refer to Note 7 for additional information on the Bancorp's portfolio of PCD loans.

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

Standards Adopted in 2020
The Bancorp adopted the following new accounting standards during the nine months ended September 30, 2020:

ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, which establishes a new approach to estimate credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets, and requires the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. This model applies to trade and other receivables, loans, debt securities, net investments in leases, and off-balance sheet credit exposures (such as loan commitments, standby letters of credit, and financial guarantees not accounted for as insurance). This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect. This allowance is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected. The expected credit loss model also applies to purchased financial assets with credit deterioration, superseding previous accounting guidance for such assets. The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model requires an entity to recognize an allowance for credit losses on available-for-sale debt securities as a contra account to the amortized cost basis, instead of a direct reduction of the amortized cost basis of the investment, as under previous guidance. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance. Subsequent to the issuance of ASU 2016-13, the FASB has issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued in November 2018), ASU 2019-04 (issued in April 2019), ASU 2019-05 (issued in May 2019) and ASU 2019-11 (issued in November 2019).

The Bancorp adopted the amended guidance on January 1, 2020, using a modified retrospective approach, although certain provisions of the guidance are only required to be applied on a prospective basis. Upon adoption, the Bancorp recorded a combined increase to the ALLL and reserve for unfunded commitments of approximately $653 million and a cumulative-effect adjustment to retained earnings of $472 million. Of the increase to the ALLL, approximately $33 million pertained to the recognition of an ALLL on purchased financial assets with credit deterioration and was also added to the carrying value of the related loans. Adoption of the amended guidance did not have a material impact to the Bancorp’s investment securities portfolio. The required disclosures are included in Note 7.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, which simplifies the test for goodwill impairment by removing the second step, which measures the amount of impairment loss, if any. Instead, the amended guidance states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance applies to all reporting units, including those with zero or negative carrying amounts of net assets. The Bancorp adopted the amended guidance on January 1, 2020. The amended guidance is applied prospectively to all goodwill impairment tests performed after the adoption date.

ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements for fair value measurements. The amendments remove the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. The amendments also add new disclosure requirements regarding unrealized gains and losses from recurring Level 3 fair value measurements and the significant unobservable inputs used to develop Level 3 fair value measurements. The Bancorp adopted the amended guidance on January 1, 2020 and the required disclosures are included in Note 24.

ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15, which provides guidance on the accounting for implementation, setup and other upfront costs incurred by customers in cloud computing arrangements that are accounted for as service contracts. The amendments require that implementation costs be evaluated for capitalization using the framework applicable to costs incurred to develop or obtain internal-use software. Those capitalized costs are to be expensed over the term of the cloud computing arrangement and presented in the same financial statement line items as the service contract and its associated fees. The Bancorp adopted the amended guidance on January 1, 2020 on a prospective basis.

ASU 2020-04 – Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate on Financial Reporting
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. The expedients and exceptions provided by the amendments do 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 that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for the Bancorp as of March 12, 2020 through December 31, 2022. The Bancorp is in the process of evaluating and applying, as applicable, the optional expedients and exceptions in accounting for eligible contract modifications, eligible existing hedging relationships and new hedging relationships available through December 31, 2022.

Standards Issued but Not Yet Adopted
The following accounting standards were issued but not yet adopted by the Bancorp as of September 30, 2020:

ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also clarify and amend existing guidance for other areas of Topic 740. The amended guidance is effective for the Bancorp on January 1, 2021 with early adoption permitted, and is to be applied either prospectively or retrospectively for the specific amendment based on the transition method prescribed by the FASB. The Bancorp is in the process of evaluating the impact of the amended guidance on its Condensed Consolidated Financial Statements. However, the Bancorp does not currently expect the impact of adoption to be material.

Regulatory Developments Related to the COVID-19 Pandemic
On March 22, 2020, various national banking regulatory agencies jointly issued an interagency statement addressing loan modifications and reporting for financial institutions working with customers affected by the COVID-19 pandemic. The statement describes the agencies’ interpretation of how existing guidance in U.S. GAAP applies to certain loan modifications related to COVID-19. Among other things, the statement affirms that short-term modifications (e.g., six months) made on a good faith basis in response to COVID-19 to borrowers who were less than 30 days past due on contractual payments at the time a modification program is implemented would not be considered TDRs. The statement also clarifies that loans modified in response to the COVID-19 pandemic should be evaluated on the basis of their modified terms when reporting loans as past due and evaluating for nonaccrual status and charge-off.

On March 27, 2020, the CARES Act was signed into law. Section 4013 of the CARES Act provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time in certain circumstances. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020 or 60 days after the termination of the COVID-19 national emergency. On April 7, 2020, the national banking regulatory agencies revised their previously issued interagency statement to clarify the interactions with the provisions of Section 4013 of the CARES Act.

The Bancorp has elected to apply the temporary suspension of TDR requirements provided by the CARES Act for eligible loan modifications. For loan modifications that are not eligible for the suspension offered by the CARES Act or that are executed outside its applicable period, the Bancorp considers the interpretive guidance provided in the revised interagency statement to evaluate loan modifications within its scope, or existing TDR evaluation policies if the modification does not fall within the scope of the interagency statement.

Loans and leases which received payment deferrals or forbearances as part of the Bancorp’s COVID-19 customer relief programs are generally not reported as delinquent if the loan or lease was less than 30 days past due at March 1, 2020 (the effective date of the COVID-19 national emergency declaration) unless the loan or lease subsequently becomes delinquent according to its modified terms. Those loans and leases that were 30 days or more past due at March 1, 2020 continue to be reported at their March 1, 2020 delinquency status unless the borrower makes supplemental payments to resolve the delinquency. After the conclusion of the payment deferral or forbearance period, borrowers who were delinquent as of March 1, 2020 may be returned to current status once they demonstrate a willingness and ability to repay the loan according to its modified terms. This may be evidenced by payment history after the payment deferral or forbearance period, or by completing an evaluation of the borrower’s creditworthiness upon exit from the Bancorp’s hardship programs.

On April 10, 2020, the FASB staff issued a question-and-answer document (Q&A) to address questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. Under Topic 842, subsequent changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. Some contracts may contain explicit or implicit enforceable rights and obligations that require lease concessions in certain circumstances and therefore would not be considered a lease modification. Given the significant cost and complexity in assessing the large volume of lease contracts for which concessions are being granted due to the COVID-19 pandemic, the FASB clarified in this Q&A that an entity can elect to account for lease concessions associated with the COVID-19 pandemic as though enforceable rights and obligations for those concessions existed. This guidance eliminates the requirement to analyze each contract to determine whether enforceable rights and obligations to provide concessions exist and allows an entity to elect to apply or not apply the lease modification guidance in Topic 842. This election is only available for concessions related to the effect of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.

The Bancorp has elected to not apply the lease modification accounting guidance in Topic 842 for lease concessions granted as a result of the COVID-19 pandemic as the deferrals only affect the timing of the payments and the amount of consideration to be received is substantially the same as that required by the original contract.

Updates to Significant Accounting and Reporting Policies
In conjunction with the adoption of new accounting standards, the Bancorp has updated its accounting and reporting policies for investment securities, portfolio loans and leases, the ALLL, the reserve for unfunded commitments and goodwill 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, 2019 for discussion of these accounting and reporting policies for periods prior to January 1, 2020.

Investment securities
Debt securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities which 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 available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Trading debt securities are reported at fair value with unrealized gains and losses included in noninterest income. Available-for-sale debt securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in OCI. Accrued interest receivables on investment securities are presented in the Condensed Consolidated Balance Sheets as a component of other assets.

Available-for-sale debt securities with unrealized losses are reviewed quarterly to determine if the decline in fair value is the result of a credit loss or other factors. An allowance for credit losses is recorded against available-for-sale securities to reflect the amount of the unrealized loss attributable to credit; however, this impairment is limited by the amount that the fair value is less than the amortized cost basis. Any remaining unrealized loss is recognized through OCI. Changes in the allowance for credit losses are recognized in earnings.

The determination of whether or not a credit loss exists is based on consideration of the cash flows expected to be collected from the debt security. The Bancorp develops these expectations after considering various factors such as agency ratings, the financial condition of the issuer or underlying obligors, payment history, payment structure of the security, industry and market conditions, underlying collateral and other factors which may be relevant based on the facts and circumstances pertaining to individual securities.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

If the Bancorp intends to sell the debt security or will more likely than not be required to sell the debt security before recovery of its amortized cost basis, then the allowance for credit losses, if previously recorded, is written off and the security’s amortized cost is written down to the security’s fair value at the reporting date, with any incremental impairment recorded as a charge to noninterest income.

Held-to-maturity debt securities are assessed periodically to determine if a valuation allowance is necessary to absorb credit losses expected to occur over the remaining contractual life of the securities. The carrying amount of held-to-maturity debt securities is presented net of the valuation allowance for credit losses when such an allowance is deemed necessary.

Equity securities with readily determinable fair values not accounted for under the equity method are reported at fair value with unrealized gains and losses included in noninterest income in the Condensed Consolidated Statements of Income. Equity securities without readily determinable fair values are measured at cost minus impairment, if any, plus or minus changes as a result of an observable price change for the identical or similar investment of the same issuer. At each quarterly reporting period, the Bancorp performs a qualitative assessment to evaluate whether impairment indicators are present. If qualitative indicators are identified, the investment is measured at fair value with the impairment loss included in noninterest income in the Condensed Consolidated Statements of Income.

The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments or DCF models that incorporate market inputs and assumptions including discount rates, prepayment speeds and loss rates.

The premium on purchased callable debt securities is amortized to the earliest call date if the call feature meets certain criteria. Otherwise, the premium is amortized to maturity similar to the discount on the callable debt securities.

Realized securities gains or losses are reported within noninterest income in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.

Portfolio loans and leases—basis of accounting
Portfolio loans and leases are generally reported at the principal amount outstanding, net of unearned income, deferred direct loan origination fees and costs and any direct principal charge-offs. Direct loan origination fees and costs are deferred and the net amount is amortized over the estimated life of the related loans as a yield adjustment. Interest income is recognized based on the principal balance outstanding computed using the effective interest method.

Loans and leases acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. Purchased loans and finance leases (including both sales-type leases and direct financing leases) are evaluated for evidence of credit deterioration at acquisition and recorded at their initial fair value. For loans and finance leases that do not exhibit evidence of more-than-insignificant credit deterioration since origination, the Bancorp does not carry over the acquired company’s ALLL, but upon acquisition will record an ALLL and provision for credit losses reflective of credit losses expected to be incurred over the remaining contractual life of the acquired loans. Premiums and discounts reflected in the initial fair value are amortized over the contractual life of the loan as an adjustment to yield.

For loans and finance leases that exhibit evidence of more-than-insignificant credit quality deterioration since origination, the Bancorp’s estimate of expected credit losses is added to the ALLL upon acquisition and to the initial purchase price of the loans and leases to determine the initial amortized cost basis for the purchased financial assets with credit deterioration. Any resulting difference between the initial amortized cost basis (as adjusted for expected credit losses) and the par value of the loans and leases at the acquisition date represents the non-credit premium or discount, which is amortized over the contractual life of the loan or lease as an adjustment to yield. This method of accounting for loans acquired with deteriorated credit quality does not apply to loans carried at fair value or residential mortgage loans held for sale.

The Bancorp’s lease portfolio consists of sales-type, direct financing and leveraged leases. Sales-type and direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, less unearned income. Interest income on sales-type and direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment.

Leveraged leases, entered into before January 1, 2019, are carried at the aggregate of lease payments (less nonrecourse debt payments) plus estimated residual value of the leased property, less unearned income. Interest income on leveraged leases is recognized over the term of the lease to achieve a constant rate of return on the outstanding investment in the lease, net of the related deferred income tax liability, in the years in which the net investment is positive. Leveraged lease accounting is no longer applied for leases entered into or modified after the Bancorp’s adoption of ASU 2016-02, Leases, on January 1, 2019.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 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. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 7.

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 the Bancorp reasonably expects to execute a TDR with the borrower or where certain extension or renewal options are embedded in the original contract and not unconditionally cancellable by the Bancorp.

Accrued interest receivables on loans are 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 an allowance for credit losses for accrued interest receivables. Refer to the Portfolio Loans and Leases section for additional information.

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 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.

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 that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, 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 structure and other factors when determining the amount of 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 present value of expected future cash flows discounted at the loan’s effective interest rate. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual. Specific allowances on individually evaluated commercial loans and leases, including TDRs, 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. These include commercial loans and leases that do not meet the criteria for individual evaluation as well as homogeneous loans and leases in the residential mortgage and consumer portfolio segments. 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 grades, 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
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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. 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 changing economic conditions have on the Bancorp’s customers.

Reserve for unfunded commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities and is included in other liabilities in the Condensed Consolidated Balance Sheets. The determination of the adequacy of the reserve is based upon expected credit losses over the remaining contractual life of the commitments, taking into consideration the current funded balance and estimated exposure over the reasonable and supportable forecast period. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorp’s ALLL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in provision for credit losses in the Condensed Consolidated Statements of Income.

Goodwill
Business combinations entered into by the Bancorp typically include the recognition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorp’s reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Bancorp evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Bancorp, the performance of the Bancorp’s common stock, the key financial performance metrics of the Bancorp’s reporting units and events affecting the reporting units to determine if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Bancorp performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Bancorp’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorp’s stock price. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. The Bancorp employs an income-based approach, utilizing the reporting unit’s forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting unit’s estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of each reporting unit’s forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations and actual results may differ from forecasted results. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorp’s stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorp’s reporting units in order to corroborate the results of the income approach. Refer to Note 11 of the Notes to Condensed Consolidated Financial Statements for further information regarding the Bancorp’s goodwill.

92


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
5. 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 investment securities portfolios as of:
September 30, 2020 ($ in millions) Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities $ 75  3    78 
Obligations of states and political subdivisions securities 17      17 
Mortgage-backed securities:
Agency residential mortgage-backed securities 11,711  894  (2) 12,603 
Agency commercial mortgage-backed securities 16,173  1,578  (1) 17,750 
Non-agency commercial mortgage-backed securities 3,317  258    3,575 
Asset-backed securities and other debt securities 2,869  37  (35) 2,871 
Other securities(a)
531      531 
Total available-for-sale debt and other securities $ 34,693  2,770  (38) 37,425 
Held-to-maturity securities:
Obligations of states and political subdivisions securities $ 13      13 
Asset-backed securities and other debt securities 2      2 
Total held-to-maturity securities $ 15      15 
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $47, $482 and $2, respectively, at September 30, 2020, that are carried at cost.

December 31, 2019 ($ in millions) Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities $ 74  —  75 
Obligations of states and political subdivisions securities 18  —  —  18 
Mortgage-backed securities:
Agency residential mortgage-backed securities 13,746  388  (19) 14,115 
Agency commercial mortgage-backed securities 15,141  564  (12) 15,693 
Non-agency commercial mortgage-backed securities 3,242  123  —  3,365 
Asset-backed securities and other debt securities 2,189  29  (12) 2,206 
Other securities(a)
556  —  —  556 
Total available-for-sale debt and other securities $ 34,966  1,105  (43) 36,028 
Held-to-maturity securities:
Obligations of states and political subdivisions securities $ 15  —  —  15 
Asset-backed securities and other debt securities —  — 
Total held-to-maturity securities $ 17  —  —  17 
(a)Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $76, $478 and $2, respectively, at December 31, 2019, that are carried at cost.

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

($ in millions)
September 30,
2020
December 31,
2019
Trading debt securities $ 704  297 
Equity securities 277  564 

The amounts reported in the preceding tables exclude accrued interest receivables on investment securities of $90 million at September 30, 2020, which are 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 to satisfy regulatory requirements. 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 gains (losses), net – non-qualifying hedges on MSRs in the Condensed Consolidated Statements of Income.

93


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents securities gains (losses) recognized in the Condensed Consolidated Statements of Income:
For the three months ended September 30, For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Available-for-sale debt and other securities:
Realized gains $ 46  47  51 
Realized losses (1) —  (2) (47)
OTTI   —    (1)
Net realized gains on available-for sale debt and other securities $ 45  45 
Total trading debt securities gains (losses) $ (1) —  3 
Total equity securities gains(a)
$ 6  3  27 
Total gains recognized in income from available-for-sale debt and other securities, trading debt securities and equity securities(b)
$ 50  51  35 
(a)Includes net unrealized losses of $1 and $3 for the three and nine months ended September 30, 2020, respectively, and an immaterial net unrealized gain and a net unrealized gain of $23 for the three and nine months ended September 30, 2019, respectively.
(b)Excludes $1 and $7 of net securities gains for the three and nine months ended September 30, 2020, respectively, and $2 and $6 of net securities gains for the three and nine months ended September 30, 2019, respectively, related to securities held by FTS to facilitate the timely execution of customer transactions. These gains are included in commercial banking revenue and wealth and asset management revenue in the Condensed Consolidated Statements of Income.

Upon adoption of ASU 2016-13 on January 1, 2020, the Bancorp evaluates available-for-sale debt and other securities in an unrealized loss position to determine whether all or a portion of the unrealized loss on such securities is a credit loss. If credit losses are identified, they are generally recognized as an allowance for credit losses (a contra account to the amortized cost basis of the securities) with the periodic change in the allowance recognized in earnings. Prior to January 1, 2020, investment securities were evaluated for OTTI with any identified OTTI recognized as a charge to income and a direct reduction of the amortized cost basis of the securities.

At September 30, 2020, 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 for the three and nine months ended September 30, 2020 related to available-for-sale debt and other securities in an unrealized loss position.

At September 30, 2020 and December 31, 2019, investment securities with a fair value of $10.6 billion and $8.1 billion, respectively, were pledged to secure borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.

The expected maturity distribution of the Bancorp’s 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 investment securities as of September 30, 2020 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)
Less than 1 year $ 516  538 
1-5 years 13,612  14,538 
5-10 years 14,103  15,463  —  — 
Over 10 years 5,931  6,355 
Other securities 531  531  —  — 
Total $ 34,693  37,425  15  15 
(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
September 30, 2020
Agency residential mortgage-backed securities $ 72  (2) 1    73  (2)
Agency commercial mortgage-backed securities 75  (1)     75  (1)
Non-agency commercial mortgage-backed securities 24        24   
Asset-backed securities and other debt securities 864  (16) 533  (19) 1,397  (35)
Total $ 1,035  (19) 534  (19) 1,569  (38)
December 31, 2019
Agency residential mortgage-backed securities $ 2,159  (19) —  2,163  (19)
Agency commercial mortgage-backed securities 1,602  (12) —  —  1,602  (12)
Asset-backed securities and other debt securities 367  (3) 379  (9) 746  (12)
Total $ 4,128  (34) 383  (9) 4,511  (43)

At September 30, 2020 and December 31, 2019, $2 million and an immaterial amount of unrealized losses in the available-for-sale debt and other securities portfolio were represented by non-rated securities, respectively.

6. 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 7.

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)
September 30,
2020
December 31,
2019
Loans and leases held for sale:
Commercial and industrial loans $ 57  135 
Commercial mortgage loans 2 
Residential mortgage loans 2,264  1,264 
Total loans and leases held for sale $ 2,323  1,400 
Portfolio loans and leases:
Commercial and industrial loans(a)
$ 51,695  50,542 
Commercial mortgage loans 10,878  10,963 
Commercial construction loans 5,656  5,090 
Commercial leases 3,021  3,363 
Total commercial loans and leases $ 71,250  69,958 
Residential mortgage loans(b)
$ 16,158  16,724 
Home equity 5,455  6,083 
Indirect secured consumer loans 12,925  11,538 
Credit card 2,087  2,532 
Other consumer loans 2,856  2,723 
Total consumer loans $ 39,481  39,600 
Total portfolio loans and leases $ 110,731  109,558 
(a)Includes $5.2 billion, as of September 30, 2020, related to the SBA’s Paycheck Protection Program established under the CARES Act on March 27, 2020.
(b)Includes $51 million, as of September 30, 2020, of residential mortgage loans previously sold to GNMA for which the Bancorp is deemed to have regained effective control over under ASC Topic 860, but did not exercise its option to repurchase. Refer to Note 16 for further information.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Portfolio loans and leases are recorded net of unearned income, which totaled $301 million as of September 30, 2020 and $354 million as of December 31, 2019. 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 premium of $228 million and $249 million as of September 30, 2020 and December 31, 2019, respectively. The amortized cost basis of loans and leases excludes accrued interest receivables of $361 million at September 30, 2020, which are 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 $16.7 billion at September 30, 2020 and December 31, 2019, respectively, pledged at the FHLB, and loans of $35.1 billion and $47.3 billion at September 30, 2020 and December 31, 2019, respectively, pledged at the FRB.

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

($ in millions)
September 30,
2020
December 31,
2019
September 30,
2020
December 31,
2019
Commercial and industrial loans $ 51,752  50,677  4  11 
Commercial mortgage loans 10,880  10,964  26  15 
Commercial construction loans 5,656  5,090    — 
Commercial leases 3,021  3,363  2  — 
Residential mortgage loans 18,422  17,988  67  50 
Home equity 5,455  6,083  2 
Indirect secured consumer loans 12,925  11,538  10  10 
Credit card 2,087  2,532  27  42 
Other consumer loans 2,856  2,723  1 
Total loans and leases $ 113,054  110,958  139  130 
Less: Loans and leases held for sale $ 2,323  1,400 
Total portfolio loans and leases $ 110,731  109,558 

The following table presents a summary of net charge-offs (recoveries):
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Commercial and industrial loans $ 42  29  157  67 
Commercial mortgage loans 11  —  14  (1)
Commercial leases 8  24 
Residential mortgage loans (1) 1 
Home equity 1  5 
Indirect secured consumer loans 3  13  23  34 
Credit card 29  33  100  101 
Other consumer loans 8  17  29  39 
Total net charge-offs $ 101  99  353  256 

The Bancorp engages in commercial lease products primarily related to the financing of commercial equipment. Leases are classified as sales-type if the Bancorp transfers control of the underlying asset to the lessee. The Bancorp classifies leases that do not meet any of the criteria for a sales-type lease as a direct financing lease if the present value of the sum of the lease payments and any residual value guaranteed by the lessee and/or any other third party equals or exceeds substantially all of the fair value of the underlying asset and the collection of the lease payments and residual value guarantee is probable.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents the components of the net investment in leases as of:
($ in millions)(a)
September 30,
2020
December 31, 2019
Net investment in direct financing leases:
Lease payment receivable (present value) $ 1,610  2,196 
Unguaranteed residual assets (present value) 198  220 
Net discount on acquired leases   (7)
Net investment in sales-type leases:
Lease payment receivable (present value) 818  510 
Unguaranteed residual assets (present value) 29  15 
(a)Excludes $366 and $429 of leveraged leases at September 30, 2020 and December 31, 2019, respectively.

Interest income recognized in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 was $16 million and $50 million, respectively, for direct financing leases and $7 million and $20 million, respectively, for sales-type leases. For the three and nine months ended September 30, 2019, interest income recognized was $22 million and $70 million, respectively, for direct financing leases and $4 million and $7 million, respectively, for sales-type leases.

The following table presents undiscounted cash flows for both direct financing and sales-type leases for the remainder of 2020 through 2025 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:
As of September 30, 2020 ($ in millions) Direct Financing
Leases
Sales-Type Leases
Remainder of 2020 $ 137  57 
2021 503  226 
2022 397  197 
2023 232  144 
2024 172  108 
2025 115  56 
Thereafter 165  113 
Total undiscounted cash flows $ 1,721  901 
Less: Difference between undiscounted cash flows and discounted cash flows 111  83 
Present value of lease payments (recognized as lease receivables) $ 1,610  818 

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 $33 million at September 30, 2020 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 residual value, in the net investment in leases. The Bancorp maintained an allowance of $17 million at December 31, 2019 to cover the inherent losses, including the potential losses related to the residual value, in the net investment in leases. Refer to Note 7 for additional information on credit quality and the ALLL.
97


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
7. 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 September 30, 2020 ($ in millions)
Commercial
Residential
Mortgage

Consumer

Unallocated

Total
Balance, beginning of period $ 1,502  327  867    2,696 
Losses charged off(a)
(66) (1) (68)   (135)
Recoveries of losses previously charged off(a)
5  2  27    34 
(Benefit from) provision for loan and lease losses 92  (31) (82)   (21)
Balance, end of period $ 1,533  297  744    2,574 
(a)The Bancorp recorded $9 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
For the three months ended September 30, 2019 ($ in millions)

Commercial
Residential
Mortgage

Consumer

Unallocated

Total
Balance, beginning of period $ 651  76  276  112  1,115 
Losses charged off(a)
(34) (2) (94) —  (130)
Recoveries of losses previously charged off(a)
29  —  31 
Provision for loan and lease losses 53  —  72  127 
Balance, end of period $ 671  75  283  114  1,143 
(a)The Bancorp recorded $12 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
For the nine months ended September 30, 2020 ($ in millions)

Commercial
Residential
Mortgage

Consumer

Unallocated

Total
Balance, beginning of period $ 710  73  298  121  1,202 
Impact of adoption of ASU 2016-13(a)
160  196  408  (121) 643 
Losses charged off(b)
(209) (6) (242)   (457)
Recoveries of losses previously charged off(b)
14  5  85    104 
Provision for loan and lease losses 858  29  195    1,082 
Balance, end of period $ 1,533  297  744    2,574 
(a)Includes $31, $2 and $1 in Commercial, Residential Mortgage and Consumer, respectively, related to the initial recognition of an ALLL on PCD loans.
(b)The Bancorp recorded $31 in both losses charged off and recoveries of losses previously charged off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.
For the nine months ended September 30, 2019 ($ in millions)
Commercial Residential Mortgage Consumer Unallocated Total
Balance, beginning of period $ 645  81  267  110  1,103 
Losses charged off(a)
(87) (5) (266) —  (358)
Recoveries of losses previously charged off(a)
14  84  —  102 
Provision for (benefit from) loan and lease losses 99  (5) 198  296 
Balance, end of period $ 671  75  283  114  1,143 
(a)The Bancorp recorded $35 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.

98


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 September 30, 2020 ($ in millions)
Commercial
Residential
Mortgage

Consumer

Total
ALLL:(a)
Individually evaluated $ 178  78  46  302 
Collectively evaluated 1,355  219  698  2,272 
Total ALLL $ 1,533  297  744  2,574 
Portfolio loans and leases:(b)
Individually evaluated $ 1,111  650  280  2,041 
Collectively evaluated 69,743  15,255  23,025  108,023 
Purchased credit deteriorated(c)
396  79  18  493 
Total portfolio loans and leases $ 71,250  15,984  23,323  110,557 
(a)Includes $3 related to commercial leveraged leases at September 30, 2020.
(b)Excludes $174 of residential mortgage loans measured at fair value and includes $366 of commercial leveraged leases, net of unearned income at September 30, 2020.
(c)Includes $51, as of September 30, 2020, of residential mortgage loans previously sold to GNMA for which the Bancorp is deemed to have regained effective control over under ASC Topic 860, but did not exercise its option to repurchase. Refer to Note 16 for further information.
As of December 31, 2019 ($ in millions)

Commercial
Residential
Mortgage

Consumer

Unallocated

Total
ALLL:(a)
Individually evaluated for impairment $ 82  55  33  —  170 
Collectively evaluated for impairment 628  18  265  —  911 
Unallocated —  —  —  121  121 
Total ALLL $ 710  73  298  121  1,202 
Portfolio loans and leases:(b)

Individually evaluated for impairment $ 413  814  302  —  1,529 
Collectively evaluated for impairment 69,047  15,690  22,558  —  107,295 
Purchased credit impaired 498  37  16  —  551 
Total portfolio loans and leases $ 69,958  16,541  22,876  —  109,375 
(a)Includes $1 related to commercial leveraged leases at December 31, 2019.
(b)Excludes $183 of residential mortgage loans measured at fair value and includes $429 of commercial leveraged leases, net of unearned income at December 31, 2019.

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 grades: 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 in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work
99


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

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, 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. Refer to Note 4 for additional 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.

100


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table summarizes the credit risk profile of the Bancorp’s commercial portfolio segment, by class and vintage:
As of September 30, 2020 ($ in millions) Term Loans and Leases
Amortized Cost Basis by Origination Year
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized Cost Basis
2020 2019 2018 2017 2016 Prior Total
Commercial and industrial loans:
Pass $ 6,755  2,329  1,288  849  561  856  31,689    44,327 
Special mention 96  67  86  40  10  21  3,661    3,981 
Substandard 167  77  269  87  44  121  2,610    3,375 
Doubtful             12    12 
Total commercial and industrial loans $ 7,018  2,473  1,643  976  615  998  37,972    51,695 
Commercial mortgage owner-occupied loans:

Pass $ 905  693  466  308  258  489  1,033    4,152 
Special mention 57  8  28  13  12  16  83    217 
Substandard 219  36  40  10  14  36  80    435 
Doubtful                  
Total commercial mortgage owner-occupied loans
$ 1,181  737  534  331  284  541  1,196    4,804 
Commercial mortgage nonowner-occupied loans:

Pass $ 738  865  564  298  248  391  1,818    4,922 
Special mention 254  1  16  3  28  20  402    724 
Substandard 129  7  61  12  2  43  174    428 
Doubtful                  
Total commercial mortgage nonowner-occupied loans
$ 1,121  873  641  313  278  454  2,394    6,074 
Commercial construction loans:

Pass $ 26  58  28    9  12  4,949    5,082 
Special mention 40            477    517 
Substandard 5            52    57 
Doubtful                  
Total commercial construction loans $ 71  58  28    9  12  5,478    5,656 
Commercial leases:

Pass $ 447  392  328  399  334  943      2,843 
Special mention 3  40  16  6  6  8      79 
Substandard 4  4  19  33  7  32      99 
Doubtful                  
Total commercial leases $ 454  436  363  438  347  983      3,021 
Total commercial loans and leases:
Pass $ 8,871  4,337  2,674  1,854  1,410  2,691  39,489    61,326 
Special mention 450  116  146  62  56  65  4,623    5,518 
Substandard 524  124  389  142  67  232  2,916    4,394 
Doubtful             12    12 
Total commercial loans and leases $ 9,845  4,577  3,209  2,058  1,533  2,988  47,040    71,250 

101


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table summarizes the credit risk profile of the Bancorp’s commercial portfolio segment, by class:
As of December 31, 2019 ($ in millions)
Pass
Special
Mention

Substandard

Doubtful

Total
Commercial and industrial loans $ 47,671  1,423  1,406  42  50,542 
Commercial mortgage owner-occupied loans 4,421  162  293  4,880 
Commercial mortgage nonowner-occupied loans 5,866  135  82  —  6,083 
Commercial construction loans 4,963  52  75  —  5,090 
Commercial leases 3,222  53  88  —  3,363 
Total commercial loans and leases $ 66,143  1,825  1,944  46  69,958 

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 September 30, 2020 ($ in millions)
30-89
Days(a)
90 Days
or More(a)
Total
Past Due
Commercial loans and leases:
Commercial and industrial loans $ 51,413  140  142  282  51,695  4 
Commercial mortgage owner-occupied loans 4,753  14  37  51  4,804  22 
Commercial mortgage nonowner-occupied loans 5,979  58  37  95  6,074  4 
Commercial construction loans 5,654  2    2  5,656   
Commercial leases 3,007  4  10  14  3,021  2 
Total portfolio commercial loans and leases $ 70,806  218  226  444  71,250  32 
(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, 2019 ($ in millions)
30-89
Days(a)
90 Days
or More(a)
Total
Past Due
Commercial loans and leases:
Commercial and industrial loans $ 50,305  133  104  237  50,542  11 
Commercial mortgage owner-occupied loans 4,853  23  27  4,880 
Commercial mortgage nonowner-occupied loans 6,072  11  6,083 
Commercial construction loans 5,089  —  5,090  — 
Commercial leases 3,338  11  14  25  3,363  — 
Total portfolio commercial loans and leases $ 69,657  154  147  301  69,958  26 
(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 is presented in the following table. Refer to the nonaccrual loans and leases section of 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, 2019 for additional delinquency and nonperforming information.

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 particularly significant 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 credit card and 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. Refer to Note 4 for additional information about the Bancorp’s process for developing these models and its process for estimating credit losses for periods beyond the reasonable and supportable forecast period.
102


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

The following table presents a summary 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 September 30, 2020 ($ in millions) Term Loans
Amortized Cost Basis by Origination Year
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted to
Term Loans
Amortized Cost Basis
2020 2019 2018 2017 2016 Prior Total
Residential mortgage loans:
Performing:
Current(a)
$ 2,843  2,348  976  1,877  2,589  5,191      15,824 
30-89 days past due 2  1  3  4  3  11      24 
90 days or more past due   5  2  7  5  48      67 
Total performing 2,845  2,354  981  1,888  2,597  5,250      15,915 
Nonperforming       2  3  64      69 
Total residential mortgage loans(b)
$ 2,845  2,354  981  1,890  2,600  5,314      15,984 
Home equity:

Performing:

Current $ 11  27  35  5  3  164  5,086  8  5,339 
30-89 days past due           3  22    25 
90 days or more past due           2      2 
Total performing 11  27  35  5  3  169  5,108  8  5,366 
Nonperforming     1      12  75  1  89 
Total home equity $ 11  27  36  5  3  181  5,183  9  5,455 
Indirect secured consumer loans:

Performing:









Current $ 4,928  4,186  1,909  1,008  462  290      12,783 
30-89 days past due 13  38  32  19  9  5      116 
90 days or more past due 1  2  3  2  1  1      10 
Total performing 4,942  4,226  1,944  1,029  472  296      12,909 
Nonperforming   4  4  3  2  3      16 
Total indirect secured consumer loans $ 4,942  4,230  1,948  1,032  474  299      12,925 
Credit card:

Performing:
Current $             2,005    2,005 
30-89 days past due             29    29 
90 days or more past due             27    27 
Total performing             2,061    2,061 
Nonperforming             26    26 
Total credit card $             2,087    2,087 
Other consumer loans

Performing:

Current $ 605  645  502  205  37  36  803  1  2,834 
30-89 days past due 2  6  4  3      3    18 
90 days or more past due   1              1 
Total performing 607  652  506  208  37  36  806  1  2,853 
Nonperforming           1  2    3 
Total other consumer loans $ 607  652  506  208  37  37  808  1  2,856 
Total consumer loans(b)
$ 8,405  7,263  3,471  3,135  3,114  5,831  8,078  10  39,307 
(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 September 30, 2020, $91 of these loans were 30-89 days past due and $249 were 90 days or more past due. The Bancorp recognized an immaterial amount and $2 of losses during the three and nine months ended September 30, 2020, respectively, due to claim denials and curtailments associated with these insured or guaranteed loans.
(b)Excludes $174 of residential mortgage loans measured at fair value at September 30, 2020.

103


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments, by class, disaggregated into performing versus nonperforming status as of:
December 31, 2019 ($ in millions) Performing Nonperforming
Residential mortgage loans(a)
$ 16,450  91 
Home equity 5,989  94 
Indirect secured consumer loans 11,531 
Credit card 2,505  27 
Other consumer loans 2,721 
Total residential mortgage and consumer loans(a)
$ 39,196  221 
(a)Excludes $183 of residential mortgage loans measured at fair value at December 31, 2019.

Age Analysis of Past Due Consumer Loans
The following tables summarize the Bancorp’s amortized cost basis in portfolio consumer loans, by age and class:
Current
Loans and
Leases(b)(c)
Past Due Total Loans
and Leases
90 Days Past
Due and Still
Accruing
December 31, 2019 ($ in millions)
30-89
Days(c)
90 Days
or More(c)
Total
Past Due
Residential mortgage loans(a)
$ 16,372  27  142  169  16,541  50 
Consumer loans:
Home equity 5,965  61  57  118  6,083 
Indirect secured consumer loans 11,389  132  17  149  11,538  10 
Credit card 2,434  50  48  98  2,532  42 
Other consumer loans 2,702  18  21  2,723 
Total portfolio consumer loans(a)
$ 38,862  288  267  555  39,417  104 
(a)Excludes $183 of residential mortgage loans measured at fair value at December 31, 2019.
(b)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2019, $94 of these loans were 30-89 days past due and $261 were 90 days or more past due. The Bancorp recognized $1 of losses during both the three and nine months ended September 30, 2019 due to claim denials and curtailments associated with these insured or guaranteed loans.
(c)Includes accrual and nonaccrual loans and leases.

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 September 30, 2020 ($ in millions) Amortized Cost Basis
Commercial loans and leases:
Commercial and industrial loans $ 877 
Commercial mortgage owner-occupied loans 67 
Commercial mortgage nonowner-occupied loans 120 
Commercial construction loans 20 
Commercial leases 15 
Total commercial loans and leases 1,099 
Residential mortgage loans 114 
Consumer loans:
Home equity 75 
Indirect secured consumer loans
Other consumer loans — 
Total consumer loans 84 
Total portfolio loans and leases $ 1,297 

Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured loans which have not yet met the requirements to be returned to accrual status; certain restructured consumer and
104


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
residential mortgage loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property.

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 September 30, 2020 ($ in millions) For the three months ended September 30, 2020
For the nine months ended September 30, 2020
With an ALLL No Related
ALLL
Total Interest Income Recognized Interest Income Recognized
Commercial loans and leases:
Commercial and industrial loans $ 354  164  518  2  6 
Commercial mortgage owner-occupied loans
17  35  52     
Commercial mortgage nonowner-occupied loans
86  16  102     
Commercial leases 11  5  16    1 
Total nonaccrual portfolio commercial loans and leases
468  220  688  2  7 
Residential mortgage loans 10  59  69  7  22 
Consumer loans:
Home equity 58  31  89  2  7 
Indirect secured consumer loans 9  7  16     
Credit card 26    26  1  3 
Other consumer loans 3    3     
Total nonaccrual portfolio consumer loans 96  38  134  3  10 
Total nonaccrual portfolio loans and leases(a)(b)
$ 574  317  891  12  39 
OREO and other repossessed property   40  40     
Total nonperforming portfolio assets(a)(b)
$ 574  357  931  12  39 
(a)Excludes $10 of nonaccrual loans held for sale and $1 of nonaccrual restructured loans held for sale.
(b)Includes $25 of nonaccrual government insured commercial loans whose repayments are insured by the SBA, of which $13 are restructured nonaccrual government insured commercial loans.

The following table presents the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of:
($ in millions) December 31,
2019
Commercial loans and leases:
Commercial and industrial loans $ 338 
Commercial mortgage owner-occupied loans 29 
Commercial mortgage nonowner-occupied loans
Commercial construction loans
Commercial leases 28 
Total nonaccrual portfolio commercial loans and leases 397 
Residential mortgage loans 91 
Consumer loans:
Home equity 94 
Indirect secured consumer loans
Credit card 27 
Other consumer loans
Total nonaccrual portfolio consumer loans 130 
Total nonaccrual portfolio loans and leases(a)(b)
$ 618 
OREO and other repossessed property 62 
Total nonperforming portfolio assets(a)(b)
$ 680 
(a)Excludes $7 of nonaccrual loans and leases held for sale.
(b)Includes $16 of nonaccrual government insured commercial loans whose repayments are insured by the SBA, of which $11 are restructured nonaccrual government insured commercial loans.

105


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 $140 million and $212 million as of September 30, 2020 and December 31, 2019, respectively.

Troubled Debt Restructurings
A loan is accounted for as a TDR if the Bancorp, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs include concessions granted under reorganization, arrangement or other provisions of the Federal Bankruptcy Act. Within each of the Bancorp’s loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Modifying the terms of a loan may result in an increase or decrease to the ALLL depending upon the terms modified, the method used to measure the ALLL for a loan prior to modification, the extent of collateral, and whether any charge-offs were recorded on the loan before or at the time of modification. Refer to the ALLL section of Note 4 for information on the Bancorp’s ALLL methodology. Upon modification of a loan, the Bancorp measures the expected credit loss as either the difference between the amortized cost of the loan and the fair value of collateral less cost to sell or the difference between the estimated future cash flows expected to be collected on the modified loan, discounted at the original effective yield of the loan, and the carrying value of the loan. The resulting measurement may result in the need for minimal or no allowance regardless of which is used because it is probable that all cash flows will be collected under the modified terms of the loan. In addition, if the stated interest rate was increased in a TDR that is not collateral-dependent, the cash flows on the modified loan, using the pre-modification interest rate as the discount rate, often exceed the amortized cost basis of the loan. Conversely, upon a modification that reduces the stated interest rate on a loan that is not collateral-dependent, the Bancorp recognizes an increase to the ALLL. If a TDR involves a reduction of the principal balance of the loan or the loan’s accrued interest, that amount is charged off to the ALLL. Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower are treated as nonaccrual collateral-dependent loans with a charge-off recognized to reduce the carrying values of such loans to the fair value of the related collateral less costs to sell.

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 $111 million and $70 million, respectively, as of September 30, 2020 compared with $41 million and $58 million, respectively, as of December 31, 2019.

The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the three months ended:
September 30, 2020 ($ in millions)(a)
Number of Loans
Modified in a TDR
During the Period(b)
Amortized Cost Basis
of Loans Modified
in a TDR
During the Period
(Decrease)
Increase
to ALLL Upon
Modification
Charge-offs
Recognized Upon
Modification
Commercial loans:
Commercial and industrial loans 33 $ 75  1  7 
Commercial mortgage owner-occupied loans 10 19  (3)  
Commercial mortgage nonowner-occupied loans 3 16  (2)  
Residential mortgage loans 66 11     
Consumer loans:
Home equity 88 2  (3)  
Indirect secured consumer loans 14      
Credit card 1,023 6  2  1 
Total portfolio loans 1,237  $ 129  (5) 8 
(a)Excludes all loans and leases held for sale.
(b)Represents number of loans post-modification and excludes loans previously modified in a TDR.
106


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019 ($ in millions)(a)
Number of Loans
Modified in a TDR
During the Period(b)
Recorded Investment
in Loans Modified
in a TDR
During the Period
Increase
(Decrease)
to ALLL Upon
Modification
Charge-offs
Recognized Upon
Modification
Commercial loans:
Commercial and industrial loans 27 $ 72  (1) — 
Commercial mortgage owner-occupied loans 4 —  — 
Residential mortgage loans 256 39  — 
Consumer loans:
Home equity 21 —  — 
Indirect secured consumer loans 27 —  —  — 
Credit card 1,467
Total portfolio loans 1,802 $ 121 
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
(b)Represents number of loans post-modification and excludes loans previously modified in a TDR.

The following tables provide a summary of loans and leases, by class, modified in a TDR by the Bancorp during the nine months ended:
September 30, 2020 ($ in millions)(a)
Number of Loans
Modified in a TDR
During the Period(b)
Amortized Cost Basis
of 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 96 $ 250  25  7 
Commercial mortgage owner-occupied loans 38 38  (3)  
Commercial mortgage nonowner-occupied loans 15 38  (2)  
Commercial construction 3 21  1   
Residential mortgage loans 359 48  1   
Consumer loans:
Home equity 130 6  (4)  
Indirect secured consumer loans 56      
Credit card 3,880 21  8  1 
Total portfolio loans 4,577 $ 422  26  8 
(a)Excludes all loans and leases held for sale.
(b)Represents number of loans post-modification and excludes loans previously modified in a TDR.
September 30, 2019 ($ in millions)(a)
Number of Loans
Modified in a TDR
During the Period(b)
Recorded Investment
in Loans Modified
in a TDR
During the Period
(Decrease)
Increase
to ALLL Upon
Modification
Charge-offs
Recognized Upon
Modification
Commercial loans:
Commercial and industrial loans 65  $ 168  (15)
Commercial mortgage owner-occupied loans 13  10  —  — 
Residential mortgage loans 531  74  — 
Consumer loans:
Home equity 58  —  — 
Indirect secured consumer loans 65  —  —  — 
Credit card 4,250  24 
Total portfolio loans 4,982  $ 279  (8)
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
(b)Represents number of loans post-modification and excludes loans previously modified in a TDR.

The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual evaluation for an ALLL, the applicable commercial models are applied for purposes of determining the ALLL as well as qualitatively assessing whether those loans are reasonably expected to be further restructured prior to their maturity date and, if so, the impact such a restructuring would have on the remaining contractual life of the loans. When a residential mortgage, home equity, indirect secured consumer or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the expected credit loss is generally limited to the expected net proceeds from the sale of the loan’s underlying
107


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
collateral and any resulting collateral shortfall is reflected as a charge-off or an increase in ALLL. The Bancorp recognizes an ALLL for the entire balance of the credit card loans modified in a TDR that subsequently default.

The following tables provide a summary of TDRs that subsequently defaulted during the three months ended September 30, 2020 and 2019 and were within 12 months of the restructuring date:
September 30, 2020 ($ in millions)(a)
Number of
Contracts
Amortized
Cost
Commercial loans:
Commercial and industrial loans 6  $ 1 
Commercial mortgage owner-occupied loans 1  1 
Residential mortgage loans 45  8 
Consumer loans:
Home equity 2   
Indirect secured consumer loans 6   
Credit card 20   
Total portfolio loans 80  $ 10 
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
September 30, 2019 ($ in millions)(a)
Number of
Contracts
Recorded
Investment
Commercial loans:
Commercial and industrial loans $
Commercial mortgage owner-occupied loans — 
Residential mortgage loans 67  10 
Consumer loans:
Home equity — 
Credit card 69  — 
Total portfolio loans 146  $ 13 
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.

The following tables provide a summary of TDRs that subsequently defaulted during the nine months ended September 30, 2020 and 2019 and were within 12 months of the restructuring date:
September 30, 2020 ($ in millions)(a)
Number of
Contracts
Amortized
Cost
Commercial loans:
Commercial and industrial loans 12  $ 5 
Commercial mortgage owner-occupied loans 8  3 
Commercial mortgage nonowner-occupied loans 2  9 
Residential mortgage loans 117  18 
Consumer loans:
Home equity 5   
Indirect secured consumer loans 12   
Credit card 237  1 
Total portfolio loans 393  $ 36 
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
108


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019 ($ in millions)(a)
Number of
Contracts
Recorded
Investment
Commercial loans:
Commercial and industrial loans $ 20 
Commercial mortgage owner-occupied loans
Residential mortgage loans 196  30 
Consumer loans:
Home equity 12  — 
Credit card 605 
Total portfolio loans 825  $ 54 
(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.

COVID-19 Hardship Relief Programs
In response to the COVID-19 pandemic, beginning in March 2020, the Bancorp began providing financial hardship relief in the form of payment deferrals and forbearances to consumer and business customers across a wide array of lending products, as well as the suspension of vehicle repossessions and home foreclosures. The payment deferrals and forbearances generally covered periods of three to six months, depending on the program. In most cases, these offers are not classified as troubled debt restructurings (TDRs) and do not result in loans being placed on nonaccrual status. These programs were discontinued during the third quarter of 2020, except for the forbearance program for residential mortgage loans which is expected to continue accepting new enrollments through December 31, 2020. The Bancorp has also developed additional relief programs for borrowers who continue to be affected by the pandemic after conclusion of the initial relief period. Most of these new programs offer a temporary reduction in payments for a period of up to six months.

For loans that receive a payment deferral or forbearance under these hardship relief programs, the Bancorp continues to accrue interest and recognize interest income during the period of the deferral. Depending on the terms of each program, all or a portion of this accrued interest may be paid directly by the borrower (either during the relief period, at the end of the relief period or at maturity of the loan) or added to the customer’s outstanding balance. For certain programs, the maturity date of the loan may also be extended by the number of payments deferred. Interest income will continue to be recognized at the original contractual interest rate unless that rate is concurrently modified upon entering the relief program (in which case, the modified rate would be used to recognize interest).

For commercial leases that receive payment deferrals under the Bancorp’s COVID-19 pandemic hardship relief programs, the Bancorp will continue to recognize interest income during the deferral period, but the yield will be recalculated based on the timing and amount of remaining payments over the remaining lease term. The revised yield will be used for prospectively recognizing interest income and adjusting the net investment in the lease. The Bancorp’s hardship relief programs for commercial leases affect the timing of payments but do not generally result in an increase in the rights of the lessor or the obligations of the lessee. Therefore, the Bancorp has elected to forego certain requirements that would typically apply for lease modifications when accounting for the effects of the hardship relief programs. Refer to the Regulatory Developments Related to the COVID-19 Pandemic section of Note 4 for further information.


109


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table provides a summary of portfolio loans and leases as of September 30, 2020, by class, that have received payment deferrals or forbearances as part of the Bancorp’s COVID-19 pandemic hardship relief programs:
Amortized Cost Basis of Loans and Leases
Past Due(c)
Completed Relief Period
In Active Relief Period(a)
Total that Have Received Payment Relief(b)
September 30, 2020 ($ in millions)
Current(c)
30-89 Days 90 Days or More Total Past Due
Commercial loans:
Commercial and industrial loans $ 1,412  39  1,451  1,413  29  38 
Commercial mortgage owner-occupied loans 580  38  618  594  15  24 
Commercial mortgage nonowner-occupied loans 920  258  1,178  1,101  56  21  77 
Commercial construction loans 306  150  456  456  —  —  — 
Commercial leases 99  —  99  99  —  —  — 
Residential mortgage loans(b)
426  1,095  1,521  1,324  51  146  197 
Consumer loans:
Home equity 41  177  218  205  13 
Indirect secured consumer loans 924  172  1,096  1,025  63  71 
Credit card 133  18  151  131  12  20 
Other consumer loans 97  16  113  106 
Total portfolio loans and leases $ 4,938  1,963  6,901  6,454  233  214  447 
(a)Includes loans and leases that are still in the initial payment relief period (primarily residential mortgage and home equity loans) and loans that have requested additional relief.
(b)Excludes $843 of loans previously sold to GNMA that the Bancorp had the option to repurchase as a result of forbearance, $792 of which were repurchased and are classified as held for sale.
(c)For loans which are still in an active relief period, past due status is based on the borrower's status as of March 1, 2020, as adjusted based on the borrower's compliance with modified loan terms.

8. Bank Premises and Equipment
The following table provides a summary of bank premises and equipment as of:
($ in millions) September 30,
2020
December 31,
2019
Land and improvements(a)
$ 626  639 
Buildings(a)
1,587  1,575 
Equipment 2,254  2,126 
Leasehold improvements 450  432 
Construction in progress(a)
140  85 
Bank premises and equipment held for sale:
Land and improvements 27 
Buildings 17  18 
Equipment 1 
Accumulated depreciation and amortization (3,012) (2,889)
Total bank premises and equipment $ 2,090  1,995 
(a)At September 30, 2020 and December 31, 2019, land and improvements, buildings and construction in progress included $54 and $51, respectively, associated with parcels of undeveloped land intended for future branch expansion.

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 branches at certain of its existing banking center 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.

During the second quarter of 2018, the Bancorp adopted a plan to close approximately 100 to 125 branches over the next three years, exclusive of branches identified for closure as part of the MB Financial, Inc. acquisition. As of September 30, 2020, 100 branches have been closed under this plan. Additionally, the Bancorp has identified 37 branches that it expects to close in the first quarter of 2021.

110


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
As a result of the MB Financial, Inc. acquisition, the Bancorp identified 46 branches in the Chicago market that it planned to close. Of these locations, 45 were closed in the third quarter of 2019 and the final location was closed in the first quarter of 2020. These 46 branches were not part of the aforementioned plan and were in addition to the branch in the Chicago market that the Bancorp closed in November 2018. In addition, the Bancorp previously identified 11 other non-branch locations that it planned to sell that were acquired from MB Financial, Inc. These locations had a fair value, less cost to sell, of $15 million. Of these locations, seven have been sold as of September 30, 2020.

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 $11 million and $5 million for the three months ended September 30, 2020 and 2019, respectively, and $25 million and $27 million for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2019, impairment charges included $14 million associated with Fifth Third branches in the Chicago market that were assessed for impairment as a result of the MB Financial, Inc. acquisition. The recognized impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income.

9. Operating Lease Equipment
Operating lease equipment was $818 million and $848 million at September 30, 2020 and December 31, 2019, respectively. The Bancorp recorded lease income of $39 million and $44 million relating to lease payments for operating leases in leasing business revenue in the Condensed Consolidated Statements of Income during the three months ended September 30, 2020 and 2019, respectively, and $118 million and $110 million during the nine months ended September 30, 2020 and 2019, respectively. The Bancorp received payments of $119 million and $111 million related to operating leases during the nine months ended September 30, 2020 and 2019, 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 $3 million of impairment losses associated with operating lease assets for the nine months ended September 30, 2020 but did not recognize any impairment losses for the three months ended September 30, 2020 or the three and nine months ended September 30, 2019. The recognized impairment losses were recorded in leasing business revenue in the Condensed Consolidated Statements of Income.

The following table presents undiscounted future lease payments for operating leases for the remainder of 2020 through 2025 and thereafter:
As of September 30, 2020 ($ in millions) Undiscounted
Cash Flows
Remainder of 2020 $ 39 
2021 140 
2022 114 
2023 85 
2024 52 
2025 32 
Thereafter 44 
Total operating lease payments $ 506 

111


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
10. 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, 2019.

The following table provides a summary of lease assets and lease liabilities as of:
($ in millions) Condensed Consolidated Balance Sheets Caption September 30,
2020
December 31,
2019
Assets
Operating lease right-of-use assets Other assets $ 444  473 
Finance lease right-of-use assets Bank premises and equipment 112  34 
Total right-of-use assets(a)
$ 556  507 
Liabilities
Operating lease liabilities Accrued taxes, interest and expenses $ 532  555 
Finance lease liabilities Long-term debt 117  35 
Total lease liabilities $ 649  590 
(a)    Operating and finance lease right-of-use assets are recorded net of accumulated amortization of $124 and $25, respectively, as of September 30, 2020, and $75 and $27, respectively, as of December 31, 2019.

The following table presents the components of lease costs:
($ in millions) Condensed Consolidated Statements of Income Caption For the three months ended
September 30,
For the nine months ended
September 30,
2020 2019 2020 2019
Lease costs:
Amortization of ROU assets Net occupancy and equipment expense $ 4  7 
Interest on lease liabilities Interest on long-term debt 1  —  2  — 
Total finance lease costs $ 5  9 
Operating lease cost Net occupancy expense $ 29  25  76  72 
Short-term lease cost Net occupancy expense   —  1  — 
Variable lease cost Net occupancy expense 7  21  23 
Sublease income Net occupancy expense (1) (1) (2) (3)
Total operating lease costs $ 35  31  96  92 
Total lease costs $ 40  33  105  97 

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 $1 million and $5 million of impairment losses and termination charges for the ROU assets related to certain operating leases during the three months ended September 30, 2020 and 2019, respectively, and $6 million and $12 million during the nine months ended September 30, 2020 and 2019, 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 2020 through 2025 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease liabilities as follows:
As of September 30, 2020 ($ in millions)
Operating
Leases
Finance
Leases

Total
Remainder of 2020 $ 22  26 
2021 84  18  102 
2022 80  18  98 
2023 72  15  87 
2024 63  16  79 
2025 56  65 
Thereafter
242  60  302 
Total undiscounted cash flows
$ 619  140  759 
Less: Difference between undiscounted cash flows and discounted cash flows
(87) (23) (110)
Present value of lease liabilities
$ 532  117  649 

112


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:
September 30,
2020
Weighted-average remaining lease term (years):
Operating leases 9.22
Finance leases 11.94
Weighted-average discount rate:
Operating leases 3.10   %
Finance leases 2.36 

The following table presents information related to lease transactions for the nine months ended:
($ in millions)
September 30,
2020
September 30,
2019
Cash paid for amounts included in the measurement of lease liabilities:(a)
Operating cash flows from operating leases
$ 69  72 
Operating cash flows from finance leases 2 
Financing cash flows from finance leases
8 
Gains on sale and leaseback transactions  
(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.

11. Goodwill
Business combinations entered into by the Bancorp typically result in the recognition of goodwill. Acquisition activity includes acquisitions in the respective period in addition to purchase accounting adjustments related to previous acquisitions. On March 22, 2019, the Bancorp completed its acquisition of MB Financial, Inc. In connection with the acquisition, the Bancorp recorded $1.8 billion of goodwill in 2019. During the first quarter of 2020, the Bancorp finalized the valuations for the assets acquired, liabilities assumed and noncontrolling interest recognized based on additional information available subsequent to the acquisition date. As a result, the Bancorp recognized additional goodwill of $9 million in connection with the acquisition of MB Financial, Inc. during the three months ended March 31, 2020.

The Bancorp completed its annual goodwill impairment test as of September 30, 2020 and the estimated fair values of the Commercial Banking, Branch Banking and Wealth and Asset Management reporting units exceeded their carrying values, including goodwill.

Changes in the net carrying amount of goodwill, by reporting unit, for the nine months ended September 30, 2020 and the year ended December 31, 2019 were as follows:
($ in millions) Commercial
Banking
Branch
Banking
Consumer
Lending
Wealth
and Asset
Management
General
Corporate
and Other
Total
Goodwill $ 1,380  1,655  215  193  —  3,443 
Accumulated impairment losses (750) —  (215) —  —  (965)
Net carrying value as of December 31, 2018 $ 630  1,655  —  193  —  2,478 
Acquisition activity 1,324  391  —  62  —  1,777 
Sale of business —  —  —  (3) —  (3)
Net carrying value as of December 31, 2019 $ 1,954  2,046    252    4,252 
Acquisition activity 7  1    1    9 
Net carrying value as of September 30, 2020 $ 1,961  2,047    253    4,261 

113


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
12. Intangible Assets
Intangible assets consist of core deposit intangibles, customer relationships, operating leases, non-compete agreements, trade names and books of business. 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 other noninterest income or other noninterest expense in the Condensed Consolidated Statements of Income.

On March 22, 2019, the Bancorp completed its acquisition of MB Financial, Inc. In connection with the acquisition, the Bancorp recorded a $195 million core deposit intangible asset with a weighted-average amortization period of 7.2 years. Additionally, the Bancorp recorded a $24 million operating lease intangible asset with a weighted-average amortization period of 1.7 years. The fair values of these intangibles were finalized as of March 31, 2020.

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 September 30, 2020
Core deposit intangibles
$ 229  (104) 125 
Customer relationships
29  (7) 22 
Operating leases
19  (13) 6 
Non-compete agreements
3  (2) 1 
Other
4  (1) 3 
Total intangible assets
$ 284  (127) 157 
As of December 31, 2019

Core deposit intangibles
$ 229  (70) 159 
Customer relationships
29  (6) 23 
Operating leases
23  (9) 14 
Non-compete agreements
13  (11)
Other
(1)
Total intangible assets
$ 298  (97) 201 

As of September 30, 2020, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on intangible assets was $13 million and $14 million for the three months ended September 30, 2020 and 2019, respectively, and $43 million and $31 million for the nine months ended September 30, 2020 and 2019, respectively. The Bancorp’s projections of amortization expense shown in the following table are based on existing asset balances as of September 30, 2020. Future amortization expense may vary from these projections.

Estimated amortization expense for the remainder of 2020 through 2024 is as follows:
($ in millions) Total
Remainder of 2020 $ 13 
2021 43 
2022 33 
2023 24 
2024 16 

114


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
13. 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 following table provides a summary of the classifications of consolidated VIE assets and liabilities included in the Condensed Consolidated Balance Sheets for automobile loan securitizations as of:
($ in millions) September 30,
2020
December 31,
2019
Assets:
Other short-term investments $ 61  74 
Indirect secured consumer loans 887  1,354 
ALLL (9) (7)
Other assets 5 
Total assets $ 944  1,429 
Liabilities:
Other liabilities $ 2 
Long-term debt 786  1,253 
Total liabilities $ 788  1,255 

Automobile loan securitizations
In a securitization transaction that occurred in 2019, the Bancorp transferred approximately $1.43 billion in automobile loans to a bankruptcy remote trust which was deemed to be a VIE. This trust then subsequently issued approximately $1.37 billion of asset-backed notes, of which approximately $68 million were retained by the Bancorp. The Bancorp also has previously completed securitization transactions in which the Bancorp transferred certain consumer automobile loans to bankruptcy remote trusts which were also 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 the Bancorp with access to liquidity for its 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.

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:
September 30, 2020 ($ in millions) Total
Assets
Total
Liabilities
Maximum
Exposure
CDC investments $ 1,473  436  1,473 
Private equity investments 96    182 
Loans provided to VIEs 2,515    3,781 
Lease pool entities 75    75 
115


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 2019 ($ in millions) Total
Assets
Total
Liabilities
Maximum
Exposure
CDC investments $ 1,435  428  1,435 
Private equity investments 89  —  164 
Loans provided to VIEs 2,715  —  4,083 
Lease pool entities 74  —  74 

CDC investments
CDC, a wholly-owned indirect subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas and preserve historic landmarks. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited 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, 2019.

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 September 30, 2020 and December 31, 2019, the Bancorp’s CDC investments included $1.2 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 $436 million and $428 million at September 30, 2020 and December 31, 2019, respectively. The unfunded commitments as of September 30, 2020 are expected to be funded from 2020 to 2036.

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 September 30, For the nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Proportional amortization Applicable income tax expense $ 62  31  $ 94  105 
Tax credits and other benefits Applicable income tax expense (74) (35) (111) (122)
(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 nine months ended September 30, 2020 and 2019.

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 creating cross-selling opportunities for the Bancorp’s commercial products. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity 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
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
in previous tables. Also, at September 30, 2020 and December 31, 2019, the Bancorp’s unfunded commitment amounts to the private equity funds were $86 million and $75 million, respectively. As part of previous commitments, the Bancorp made capital contributions to private equity investments of $4 million and $2 million during the three months ended September 30, 2020 and 2019, respectively and $10 million and $9 million during the nine months ended September 30, 2020 and 2019, 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 6. As of September 30, 2020 and December 31, 2019, the Bancorp’s unfunded commitments to these entities were $1.3 billion and $1.4 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
As a result of the acquisition of MB Financial, Inc., the Bancorp co-invested 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 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.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
14. Sales of Receivables and Servicing Rights

Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage loans during both the three and nine months ended September 30, 2020 and 2019. 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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Residential mortgage loan sales(a)
$ 2,822  2,397  8,840  5,212 
Origination fees and gains on loan sales 93  64  269  126 
Gross mortgage servicing fees 66  71  197  196 
(a)Represents the unpaid principal balance at the time of the sale.

Servicing Rights
The Bancorp measures all of its 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 nine months ended September 30:
($ in millions) 2020 2019
Balance, beginning of period $ 993  938 
Servicing rights originated 150  99 
Servicing rights purchased 36  26 
Servicing rights obtained in acquisition   263 
Changes in fair value:
Due to changes in inputs or assumptions(a)
(340) (294)
Other changes in fair value(b)
(179) (122)
Balance, end of period $ 660  910 
(a)Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.
(b)Primarily reflects changes due to collection of contractual 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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Securities gains (losses), net non-qualifying hedges on MSRs
$ (1) —  3 
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a)
(12) 130  348  308 
MSR fair value adjustment due to changes in inputs or assumptions(a)
4  (120) (340) (294)
(a)Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The key economic assumptions used in measuring the interests in 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 September 30, 2020 and 2019 were as follows:
September 30, 2020 September 30, 2019
Rate Weighted-
Average Life
(in years)
Prepayment
Speed
(annual)
OAS
(bps)
Weighted-
Average Life
(in years)
Prepayment
Speed
(annual)
OAS
(bps)
Residential mortgage loans:
Servicing rights Fixed 5.9 12.2   % 780  5.5 13.7   % 543 
Servicing rights Adjustable 3.1 25.7  % 759  —  —  — 

Based on historical credit experience, expected credit losses for residential mortgage loan servicing rights have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At September 30, 2020 and December 31, 2019, the Bancorp serviced $73.5 billion and $80.7 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.

At September 30, 2020, 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 are as follows:
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
($ in millions)(a)
Rate Rate 10% 20% 50% 10% 20%
Residential mortgage loans:
Servicing rights Fixed $ 652  4.1 18.2  % $ (22) (42) (94) 918  $ (18) (35)
Servicing rights Adjustable 3.7 21.2  (1) (1) (2) 938  —  — 
(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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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
15. 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 in the form of cash and securities to offset changes in the fair value of the derivatives, including changes in the fair value due to credit risk of the counterparty. As of September 30, 2020 and December 31, 2019, the balance of collateral held by the Bancorp for derivative assets was $1.1 billion and $894 million, respectively. For derivative contracts cleared through certain central clearing parties who have modified their rules to treat variation margin payments as settlement of the derivative contract, the payments for variation margin of $1.2 billion and $623 million were applied to reduce the respective derivative contracts and were also not included in the total amount of collateral held as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019, the credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts was $53 million and $17 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 and securities to offset changes in fair value of the derivatives, including changes in fair value due to the Bancorp’s credit risk. As of September 30, 2020 and December 31, 2019, the balance of collateral posted by the Bancorp for derivative liabilities was $454 million and $347 million, respectively. Additionally, as of September 30, 2020 and December 31, 2019, $1.3 billion and $488 million, 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 September 30, 2020 and December 31, 2019, 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
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp’s Condensed Consolidated Financial Statements.

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

The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of:
Fair Value
September 30, 2020 ($ 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 $ 1,955  581   
Total fair value hedges 581   
Cash flow hedges:
Interest rate floors related to C&I loans 3,000  265   
Interest rate swaps related to C&I loans 8,000    1 
Total cash flow hedges 265  1 
Total derivatives designated as qualifying hedging instruments 846  1 
Derivatives Not Designated as Qualifying Hedging Instruments:
Free-standing derivatives – risk management and other business purposes:
Interest rate contracts related to MSR portfolio 6,560  227  1 
Forward contracts related to residential mortgage loans held for sale 3,087  2  10 
Swap associated with the sale of Visa, Inc. Class B Shares 3,280    188 
Foreign exchange contracts 169  3   
Interest rate contracts for collateral management 12,000  1  1 
Commercial loan trading 6     
Interest rate swaps 750     
Total free-standing derivatives – risk management and other business purposes
233  200 
Free-standing derivatives – customer accommodation:
Interest rate contracts(a)
79,286  1,399  293 
Interest rate lock commitments 3,044  85   
Commodity contracts 7,441  483  488 
TBA securities 67     
Foreign exchange contracts 13,154  176  136 
Total free-standing derivatives – customer accommodation
2,143  917 
Total derivatives not designated as qualifying hedging instruments 2,376  1,117 
Total $ 3,222  1,118 
(a)Derivative assets and liabilities are presented net of variation margin of $50 and $1,211, respectively.



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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Fair Value
December 31, 2019 ($ 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 $ 2,705  393  — 
Total fair value hedges 393  — 
Cash flow hedges:
Interest rate floors related to C&I loans 3,000  115  — 
Interest rate swaps related to C&I loans 8,000  — 
Total cash flow hedges 115 
Total derivatives designated as qualifying hedging instruments 508 
Derivatives Not Designated as Qualifying Hedging Instruments:
Free-standing derivatives – risk management and other business purposes:
Interest rate contracts related to MSR portfolio 6,420  131 
Forward contracts related to residential mortgage loans held for sale 2,901 
Swap associated with the sale of Visa, Inc. Class B Shares 3,082  —  163 
Foreign exchange contracts 195  — 
Total free-standing derivatives – risk management and other business purposes
132  175 
Free-standing derivatives – customer accommodation:
Interest rate contracts(a)
73,327  579  148 
Interest rate lock commitments 907  18  — 
Commodity contracts 8,525  271  270 
TBA securities 50  —  — 
Foreign exchange contracts 14,144  165  146 
Total free-standing derivatives – customer accommodation
1,033  564 
Total derivatives not designated as qualifying hedging instruments 1,165  739 
Total $ 1,673  741 
(a)Derivative assets and liabilities are presented net of variation margin of $40 and $493, respectively.

Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate. Decisions to convert fixed-rate funding to floating are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. As of September 30, 2020, 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 September 30, 2020 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.

On September 30, 2020, the Bancorp redeemed $750 million of unsecured senior fixed-rate bank notes which were issued by its banking subsidiary, Fifth Third Bank, National Association. Prior to this redemption, the Bancorp held an interest rate swap with a notional amount of $750 million and an October of 2020 maturity which was designated as a fair value hedge related to these senior bank notes. The Bancorp continued to hold the interest rate swap as of September 30, 2020 but de-designated hedge accounting for this instrument upon redemption of the unsecured senior bank notes. The interest rate swap was classified as a free-standing derivative for risk management and other business purposes as of September 30, 2020.

The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Condensed Consolidated Statements of Income:
Condensed Consolidated
Statements of
Income Caption
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Change in fair value of interest rate swaps hedging long- term debt
Interest on long-term debt $ (39) 75  187  219 
Change in fair value of hedged long-term debt attributable to the risk being hedged
Interest on long-term debt 39  (74) (186) (214)

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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
September 30,
2020
Carrying amount of the hedged items Long-term debt $ 2,531 
Cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged items
Long-term debt 588 

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 September 30, 2020, 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 September 30, 2020, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 51 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 September 30, 2020 and December 31, 2019, $786 million and $422 million, respectively, of net deferred gains, net of tax, on cash flow hedges were recorded in AOCI in the Condensed Consolidated Balance Sheets. As of September 30, 2020, $225 million in net unrealized gains, 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 and the addition of other hedges subsequent to September 30, 2020.

During both the three and nine months ended September 30, 2020 and 2019, 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.

The following table presents the pre-tax net 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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Amount of pre-tax net gains recognized in OCI $ 1  105  625  456 
Amount of pre-tax net gains reclassified from OCI into net income 72  165 

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 mortgage-LIBOR spread 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. 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 24 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 the two derivatives clearinghouses. These interest rate swaps were perfectly offsetting positions that allowed the Bancorp to lower the cash posted as required
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
initial margin at the clearinghouses, which reduced its credit exposure to the clearinghouses. Given that all relevant terms for these interest rate swaps are offsetting, these trades create no additional market risk for the Bancorp.

The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:
Condensed Consolidated
Statements of
Income Caption
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Interest rate contracts:
Forward contracts related to residential mortgage loans held for sale
Mortgage banking net revenue $ 7  11  (4)
Interest rate contracts related to MSR portfolio Mortgage banking net revenue (12) 130  348  308 
Foreign exchange contracts:
Foreign exchange contracts for risk management purposes
Other noninterest income (3) 4  (3)
Equity contracts:
Swap associated with sale of Visa, Inc. Class B Shares
Other noninterest income (22) (11) (73) (63)

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 for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations and commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its interest rate exposure on commercial customer transactions by executing offsetting swap agreements with primary dealers. Revaluation gains and losses on interest rate, foreign exchange, commodity and other commercial customer derivative contracts are recorded as a component of 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. As of September 30, 2020 and December 31, 2019, the total notional amount of the risk participation agreements was $3.5 billion and $3.9 billion, respectively, and the fair value was a liability of $8 million at both September 30, 2020 and December 31, 2019, which is included in other liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2020, the risk participation agreements had a weighted-average remaining life of 3.6 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) September 30,
2020
December 31,
2019
Pass $ 3,124  3,841 
Special mention 265  86 
Substandard 132  16 
Total $ 3,521  3,943 

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Notes to Condensed Consolidated Financial Statements (unaudited)
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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Interest rate contracts:
Interest rate contracts for customers (contract revenue)
Commercial banking revenue $ 5  12  31  30 
Interest rate contracts for customers (credit losses) Other noninterest expense (1) —  (1) — 
Interest rate contracts for customers (credit portion of fair value adjustment)
Other noninterest expense 1  (5) (33) (18)
Interest rate lock commitments Mortgage banking net revenue 54  50  237  108 
Commodity contracts:
Commodity contracts for customers (contract revenue)
Commercial banking revenue 4  10 
Commodity contracts for customers (credit portion of fair value adjustment)
Other noninterest expense (1) —  (2) — 
Commodity contracts for customers (credit losses) Other noninterest expense   —  (1) — 
Foreign exchange contracts:
Foreign exchange contracts for customers (contract revenue)
Commercial banking revenue 14  12  40  36 
Foreign exchange contracts for customers (contract revenue)
Other noninterest income (6) (3) 15 
Foreign exchange contracts for customers (credit portion of fair value adjustment)
Other noninterest expense 1  —  (1) — 

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 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 tables provide 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
As of September 30, 2020 ($ in millions) Derivatives
Collateral(b)
Net Amount
Assets:
Derivatives $ 3,137  (698) (795) 1,644 
Total assets 3,137  (698) (795) 1,644 
Liabilities:
Derivatives 1,118  (698) (159) 261 
Total liabilities $ 1,118  (698) (159) 261 
(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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Notes to Condensed Consolidated Financial Statements (unaudited)
Gross Amount
Recognized in the
Condensed Consolidated
Balance Sheets(a)
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets
As of December 31, 2019 ($ in millions) Derivatives
Collateral(b)
Net Amount
Assets:
Derivatives $ 1,655  (417) (504) 734 
Total assets 1,655  (417) (504) 734 
Liabilities:
Derivatives 741  (417) (97) 227 
Total liabilities $ 741  (417) (97) 227 
(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.

16. 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) September 30,
2020
December 31,
2019
Securities sold under repurchase agreements $ 659  469 
Derivative collateral 487  542 
Other secured borrowings 50  — 
Total other short-term borrowings $ 1,196  1,011 

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 September 30, 2020 and December 31, 2019, all securities sold under repurchase agreements were secured by agency residential mortgage-backed securities and the repurchase agreements have an overnight remaining contractual maturity.

As of September 30, 2020, other secured borrowings consist 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 on the balance sheet, regardless of the intent to repurchase the loans.

17. Long-Term Debt
On January 31, 2020, the Bank issued and sold, under its bank notes program, $1.25 billion in aggregate principal amount of senior fixed-rate notes. The bank notes consisted of $650 million of 1.80% senior fixed-rate notes, with a maturity of three years, due on January 30, 2023; and $600 million of 2.25% senior fixed-rate notes, with a maturity of seven years, due on February 1, 2027. On or after the date that is 30 days before the maturity date, the 1.80% senior fixed-rate notes will be redeemable, in whole or in part, at any time and from time to time, at the Bank’s option at a redemption price equal to 100% of the aggregate principal amount of the 1.80% senior fixed-rate notes being redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date. The 2.25% senior fixed-rate notes will be redeemable at the Bank’s option, in whole or in part, at any time or from time to time, on or after July 31, 2020, and prior to January 4, 2027 (the “Applicable Par Call Date”), in each case at a redemption price, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date, equal to the greater of: (a) 100% of the aggregate principal amount of the 2.25% senior fixed-rate notes being redeemed on that redemption date; and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the 2.25% senior fixed-rate notes being redeemed that would be due if the 2.25% senior fixed-rate notes to be redeemed matured on the Applicable Par Call Date (not including any portion of such payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable Treasury Rate plus the Applicable Spread for the Notes to be redeemed. Additionally, on or after January 4, 2027, the 2.25% senior fixed-rate notes will also be redeemable, in whole or in part, at any time and from time to time, at the Bank’s option at a redemption price equal to 100% of the aggregate principal amount of the 2.25% senior fixed-rate notes being redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date.

On May 5, 2020, the Bancorp issued and sold $1.25 billion in aggregate principal amount of senior fixed-rate notes. The notes consisted of $500 million of 1.625% senior fixed-rate notes, with a maturity of three years, due on May 5, 2023; and $750 million of 2.55% senior fixed-rate notes, with a maturity of seven years, due on May 5, 2027. The 1.625% and 2.55% senior fixed-rate notes will be redeemable on or after
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Notes to Condensed Consolidated Financial Statements (unaudited)
April 5, 2023 and April 5, 2027, respectively (the respective “Applicable Par Call Date”), in whole or in part, at any time and from time to time, at the Bancorp’s option at a redemption price equal to 100% of the aggregate principal amount of the senior fixed-rate notes being redeemed, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date. Additionally, the 1.625% and 2.55% senior fixed-rate notes will be redeemable at the Bancorp’s option, in whole or in part, at any time or from time to time, on or after November 2, 2020, and prior to the notes’ respective Applicable Par Call Date, in each case at a redemption price, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date, equal to the greater of: (a) 100% of the aggregate principal amount of the senior fixed-rate notes being redeemed on that redemption date; and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the senior fixed-rate notes being redeemed that would be due if the senior fixed-rate notes to be redeemed matured on their respective Applicable Par Call Date (not including any portion of such payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable Treasury Rate plus either 25 basis points (for the 1.625% senior fixed-rate notes) or 35 basis points (for the 2.55% senior fixed-rate notes), as the case may be.

18. Capital Actions
On July 30, 2020, the Bancorp issued in a registered public offering 350,000 depositary shares, representing 14,000 shares of 4.50% fixed-rate reset non-cumulative perpetual preferred stock, Series L, for net proceeds of approximately $346 million. Each preferred share has a $25,000 liquidation preference. The preferred stock accrues dividends on a non-cumulative basis at an annual rate of 4.50% through but excluding September 30, 2025. From, and including, September 30, 2025 and for each dividend reset period thereafter, dividends will accrue on the Series L preferred stock, on a non-cumulative basis, at a rate equal to the five-year U.S. Treasury rate as of the most recent reset dividend determination date plus 4.215%. Dividends will be payable, when, as and if declared by the Bancorp's Board of Directors, quarterly in arrears on each of March 31, June 30, September 30 and December 31, beginning on September 30, 2020. Subject to obtaining all required regulatory approvals, on any dividend payment date on or after September 30, 2025, the Bancorp may redeem the Series L preferred stock and the related depositary shares in whole or in part, at 100% of their liquidation preference, plus an amount equal to any declared and unpaid dividends, without accumulation of any undeclared dividends. In addition, the Series L preferred stock and the related depositary shares may be redeemed, subject to obtaining all required regulatory approvals, in whole but not in part, at any time, following the occurrence of a regulatory capital event, at 100% of their liquidation preference, plus an amount equal to any declared and unpaid dividends, without accumulation of any undeclared dividends. The Series L preferred shares are not convertible into Bancorp common shares or any other securities.

19. 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) September 30,
2020
December 31,
2019
Commitments to extend credit $ 73,903  75,696 
Forward contracts related to residential mortgage loans held for sale 3,087  2,901 
Letters of credit 1,900  2,137 
Purchase obligations 132  113 
Capital commitments for private equity investments 86  75 
Capital expenditures 80  84 

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 September 30, 2020 and December 31, 2019, the Bancorp had a reserve for unfunded commitments, including letters of credit, totaling $182 million and $144 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.
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Notes to Condensed Consolidated Financial Statements (unaudited)

Risk ratings of outstanding commitments to extend credit under this risk rating system are summarized in the following table as of:
($ in millions) September 30,
2020
December 31,
2019
Pass $ 70,735  74,654 
Special mention 2,165  633 
Substandard 1,003  408 
Doubtful  
Total commitments to extend credit $ 73,903  75,696 

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 September 30, 2020:
($ in millions)
Less than 1 year(a)
$ 1,014 
1 - 5 years(a)
884 
Over 5 years
Total letters of credit $ 1,900 
(a)Includes $3 and $2 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire 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 September 30, 2020 and December 31, 2019, and are considered guarantees in accordance with U.S. GAAP. Approximately 67% and 66% of the total standby letters of credit were collateralized as of September 30, 2020 and December 31, 2019, 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 $32 million and $20 million at September 30, 2020 and December 31, 2019, respectively. 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.

Risk ratings of outstanding letters of credit under this risk rating system are summarized in the following table as of:
($ in millions) September 30,
2020
December 31,
2019
Pass $ 1,663  2,005 
Special mention 102  20 
Substandard 135  111 
Doubtful  
Total letters of credit $ 1,900  2,137 

At September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, total VRDNs in which the Bancorp was the remarketing agent or that were supported by a Bancorp letter of credit were $405 million and $449 million, respectively, of which FTS acted as the remarketing agent to issuers on $405 million and $445 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 $161 million and $187 million of the VRDNs remarketed by FTS, in addition to zero and $3 million in VRDNs remarketed by third parties at September 30, 2020 and December 31, 2019, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. The Bancorp held zero and $3 million of these VRDNs in its portfolio and classified them as trading securities at September 30, 2020 and December 31, 2019, respectively.

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Notes to Condensed Consolidated Financial Statements (unaudited)
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 20 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, 2019.

As of September 30, 2020 and December 31, 2019, the Bancorp maintained reserves related to loans sold with representation and warranty provisions totaling $7 million and $6 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 September 30, 2020 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 $9 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.

For both the three months ended September 30, 2020 and 2019, the Bancorp paid an immaterial amount in the form of make-whole payments and repurchased $6 million and $7 million, respectively, in outstanding principal of loans to satisfy investor demands. For both the nine months ended September 30, 2020 and 2019, the Bancorp paid an immaterial amount in the form of make-whole payments and repurchased $19 million and $20 million, respectively, in outstanding principal of loans to satisfy investor demands. Total repurchase demand requests during the three months ended September 30, 2020 and 2019 were $8 million and $10 million, respectively. Total repurchase demand requests during the nine months ended September 30, 2020 and 2019 were $27 million and $38 million, respectively. Total outstanding repurchase demand inventory was $3 million and $6 million at September 30, 2020 and December 31, 2019, 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 $12 million at both September 30, 2020 and December 31, 2019. In the event of any customer default, FTS has rights to the underlying collateral provided. Given the existence of the underlying collateral provided and negligible historical credit losses, the Bancorp does not maintain a loss reserve related to the margin accounts.

Long-term borrowing obligations
The Bancorp had certain fully and unconditionally guaranteed long-term borrowing obligations issued by wholly-owned issuing trust entities of $62 million at both September 30, 2020 and December 31, 2019.

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
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Notes to Condensed Consolidated Financial Statements (unaudited)
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 23 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 September 30, 2020, 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 $188 million at September 30, 2020 and $163 million at December 31, 2019. Refer to Note 15 and Note 24 for further information.

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 
Q3 2014 450  18 
Q2 2018 600  26 
Q3 2019 300  12 

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Notes to Condensed Consolidated Financial Statements (unaudited)
20. 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 18 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. On January 14, 2014, the trial court entered a final order approving the class settlement. A number of merchants filed appeals from that approval. The U.S. Court of Appeals for the Second Circuit held a hearing on those appeals and on June 30, 2016, reversed the district court’s approval of the class settlement, remanding the case to the district court for further proceedings. On March 27, 2017, the Supreme Court of the United States denied a petition for writ of certiorari seeking to review the Second Circuit’s decision. Pursuant to the terms of the overturned settlement agreement, the Bancorp had previously paid $46 million into a class settlement escrow account. Approximately 8,000 merchants requested exclusion from the class settlement, and therefore, pursuant to the terms of the overturned settlement agreement, approximately 25% of the funds paid into the class settlement escrow account had been already returned to the control of the defendants. The remaining settlement funds paid by the Bancorp have been maintained in the escrow account. 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. However, the Settlement Agreement also provided that if between 15% and 25% of class members (by payment volume) opted out of the class, up to $700 million of the additional settlement funds would be returned to the defendants. It has now been determined that more than 25% of the class members have elected to opt out of the Amended Settlement Agreement, and, therefore, $700 million of the additional $900 million has been returned to the defendants. 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. 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. The ultimate outcome in this matter, including the timing of resolution, therefore remains uncertain. Refer to Note 19 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 actions 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 January 10, 2018, plaintiffs filed a motion to hear the immediate appeal of the dismissal of their breach of contract claim. On March 28, 2018, the court granted plaintiffs’ motion and stayed the TILA claim pending that appeal. On April 26, 2018, plaintiffs filed their notice of appeal for the breach of contract claim with the U.S. Court of Appeals for the Sixth Circuit. 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 $280 million. The plaintiffs’ motion for class certification was filed on April 20, 2020, and is now fully briefed and awaiting decision. No trial date has been set.

Helton v. Fifth Third Bank
On August 31, 2015, trust beneficiaries filed an action against Fifth Third Bank, as trustee, in the Probate Court for Hamilton County, Ohio (Helen Clarke Helton, et al. v. Fifth Third Bank, Case No. 2015003814). The plaintiffs alleged breach of the duty to diversify, breach of the duty of impartiality, breach of trust/fiduciary duty, and unjust enrichment, based on Fifth Third’s alleged failure to diversify assets held in
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
two trusts for the plaintiffs’ benefit. The lawsuit sought over $800 million in alleged damages, attorney’s fees, removal of Fifth Third as trustee, and injunctive relief. Fifth Third denied all liability. On April 20, 2018, the Court denied plaintiffs’ motion for summary judgment and granted summary judgment to Fifth Third, dismissing the case in its entirety. On December 18, 2019, the Ohio Court of Appeals affirmed the Probate Court’s dismissal of all of plaintiffs’ claims based upon allegations of Fifth Third’s alleged failure to diversify assets held in two trusts for plaintiffs’ benefit. The appeals court reversed summary judgment on one claim related to Fifth Third’s alleged unjust enrichment through its receipt of certain fees in managing the trusts. The Court of Appeals remanded the case to the Probate Court for further consideration of the lone surviving claim, which comprises a small fraction of the damages originally sought by plaintiffs in the lawsuit. Plaintiffs filed an appeal to the Ohio Supreme Court, seeking review of the decision from the Ohio Court of Appeals. On April 14, 2020, the Ohio Supreme Court announced its denial of plaintiffs’ request for review, and subsequently denied plaintiffs’ request for reconsideration. The case has now returned to the trial court for further adjudication of the lone surviving claim.

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. Fifth Third has filed a motion to transfer venue to the United States District Court for the Southern District of Ohio. The Bancorp is also subject to a consumer class action related to the alleged opening of unauthorized accounts.

Shareholder Litigation
On April 7, 2020, Plaintiff Lee Christakis filed a putative class action against Fifth Third Bancorp, Fifth Third President and Chief Executive Officer Greg D. Carmichael, and Fifth Third Chief Financial Officer Tayfun Tuzun in the U.S. District Court for the Northern District of Illinois entitled Lee Christakis, individually and on behalf of all others similarly situated v. Fifth Third Bancorp, et al., Case No. 1:20-cv-2176 (N.D. Ill). The case brings two claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the Defendants made material misstatements and omissions in connection with the alleged unauthorized opening of credit card, savings, checking, online banking and early access accounts from 2010 through 2016. The plaintiff seeks certification of a class, unspecified damages, attorneys' fees and costs. On June 29, 2020, the Court appointed Heavy & General Laborers’ Local 472 & 172 Pension and Annuity Funds as lead plaintiff, and Robins Geller Rudman & Dowd LLP as lead counsel for the plaintiff. On September 14, 2020, the lead plaintiff filed its amended consolidated complaint.

On July 31, 2020, a second putative shareholder class action 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 the alleged improper cross-selling strategy in filings made in connection with the Bancorp’s merger with MB Financial, Inc.

In addition, shareholder derivative lawsuits have been filed on behalf of the Bancorp alleging certain claims relating to an alleged improper cross-selling strategy. 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 a demand 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.

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. 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 $83 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.

21. Income Taxes
The applicable income tax expense was $165 million and $140 million for the three months ended September 30, 2020 and 2019, respectively, and $228 million and $483 million for the nine months ended September 30, 2020 and 2019, respectively. The effective tax rates for the three months ended September 30, 2020 and 2019 were 22.1% and 20.2%, respectively, and 21.6% and 21.4% for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate for the three months ended September 30, 2020 compared to the same period in the prior year was primarily related to the amount of income tax benefit recognized related to gains on sales of leases that are exempt from federal taxation for the three months ended September 30, 2019 as well as an increase in estimated state income tax expense and an increase in non-deductible expenses for the three months ended September 30, 2020.

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 12 months, the Bancorp believes it is unlikely that its unrecognized tax benefits will change by a material amount during the next 12 months.

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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
22. 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
September 30, 2020 ($ 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 $ (42) 10  (32)
Reclassification adjustment for net gains on available-for-sale debt securities included in net income (45) 11  (34)
Net unrealized gains on available-for-sale debt securities (87) 21  (66) 2,150  (66) 2,084 
Unrealized holding gains on cash flow hedge derivatives arising during period
1    1 
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
(72) 16  (56)
Net unrealized gains on cash flow hedge derivatives (71) 16  (55) 841  (55) 786 
Net actuarial loss arising during the year (2)   (2)
Reclassification of amounts to net periodic benefit costs
4  (1) 3 
Defined benefit pension plans, net
2  (1) 1  (40) 1  (39)
Total
$ (156) 36  (120) 2,951  (120) 2,831 

Total OCI Total AOCI
September 30, 2019 ($ in millions) Pre-tax
Activity
Tax
Effect
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
Unrealized holding gains on available-for-sale debt securities arising during period
$ 497  (118) 379 
Reclassification adjustment for net gains on available-for-sale debt securities included in net income (3) (2)
Net unrealized gains on available-for-sale debt securities
494  (117) 377  781  377  1,158 
Unrealized holding gains on cash flow hedge derivatives arising during period
105  (22) 83 
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (5) (4)
Net unrealized gains on cash flow hedge derivatives
100  (21) 79  440  79  519 
Reclassification of amounts to net periodic benefit costs
— 
Defined benefit pension plans, net
—  (43) (42)
Total
$ 595  (138) 457  1,178  457  1,635 

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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 nine months ended:

Total OCI Total AOCI
September 30, 2020 ($ in millions) Pre-tax
Activity
Tax Effect Net Activity Beginning Balance Net Activity Ending Balance
Unrealized holding gains on available-for-sale debt securities arising during period
$ 1,715  (409) 1,306 
Reclassification adjustment for net gains on available-for-sale debt securities included in net income (45) 11  (34)
Net unrealized gains on available-for-sale debt securities 1,670  (398) 1,272  812  1,272  2,084 
Unrealized holding gains on cash flow hedge derivatives arising during period
625  (131) 494 
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income
(165) 35  (130)
Net unrealized gains on cash flow hedge derivatives 460  (96) 364  422  364  786 
Net actuarial loss arising during the year (2)   (2)
Reclassification of amounts to net periodic benefit costs 7  (2) 5 
Defined benefit pension plans, net 5  (2) 3  (42) 3  (39)
Total $ 2,135  (496) 1,639  1,192  1,639  2,831 


Total OCI Total AOCI
September 30, 2019 ($ in millions) Pre-tax
Activity
Tax Effect Net Activity Beginning Balance Net Activity Ending Balance
Unrealized holding gains on available-for-sale debt securities arising during period
$ 1,817  (430) 1,387 
Reclassification adjustment for net gains on available-for-sale debt securities included in net income (3) (2)
Net unrealized gains on available-for-sale debt securities 1,814  (429) 1,385  (227) 1,385  1,158 
Unrealized holding gains on cash flow hedge derivatives arising during period
456  (95) 361 
Reclassification adjustment for net gains on cash flow hedge derivatives included in net income (2) —  (2)
Net unrealized gains on cash flow hedge derivatives 454  (95) 359  160  359  519 
Reclassification of amounts to net periodic benefit costs (1)
Defined benefit pension plans, net (1) (45) (42)
Total $ 2,272  (525) 1,747  (112) 1,747  1,635 
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The table below presents reclassifications out of AOCI:
Consolidated Statements of
Income Caption
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Net unrealized gains on available-for-sale debt securities:(b)
Net gains included in net income Securities gains, net $ 45  45 
Income before income taxes 45  45 
Applicable income tax expense (11) (1) (11) (1)
Net income 34  34 
Net unrealized gains on cash flow hedge derivatives:(b)
Interest rate contracts related to C&I loans Interest and fees on loans and leases 72  165 
Income before income taxes 72  165 
Applicable income tax expense (16) (1) (35) — 
Net income 56  130 
Net periodic benefit costs:(b)
Amortization of net actuarial loss
Compensation and benefits(a)
(2) (1) (5) (4)
Settlements
Compensation and benefits(a)
(2) —  (2) — 
Income before income taxes (4) (1) (7) (4)
Applicable income tax expense 1  —  2 
Net income (3) (1) (5) (3)
Total reclassifications for the period Net income $ 87  159 
(a)This AOCI component is included in the computation of net periodic benefit cost. Refer to Note 23 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019 for further information.
(b)Amounts in parentheses indicate reductions to net income.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
23. 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:
2020 2019
For the three months ended September 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  $ 530 
Less: Income allocated to participating securities 2 
Net income allocated to common shareholders $ 560  715 $ 0.78  $ 526  727 $ 0.72 
Earnings Per Diluted Share:
Net income available to common shareholders $ 562  $ 530 
Effect of dilutive securities:
Stock-based awards   4 —  9
Net income available to common shareholders plus assumed conversions 562  530 
Less: Income allocated to participating securities 2 
Net income allocated to common shareholders plus assumed conversions $ 560  719 $ 0.78  $ 526  736 $ 0.71 

2020 2019
For the nine months ended September 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 $ 754  $ 1,718 
Less: Income allocated to participating securities 3  16 
Net income allocated to common shareholders $ 751  714  $ 1.05  $ 1,702  709  $ 2.40 
Earnings Per Diluted Share:
Net income available to common shareholders $ 754  $ 1,718 
Effect of dilutive securities:
Stock-based awards   5  — 
Net income available to common shareholders plus assumed conversions 754  1,718 
Less: Income allocated to participating securities 3  16 
Net income allocated to common shareholders plus assumed conversions $ 751  719  $ 1.04  $ 1,702  718  $ 2.37 

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 both the three and nine months ended September 30, 2020 excludes 9 million shares of stock-based awards because their inclusion would have been anti-dilutive. The diluted earnings per share computation for both the three and nine months ended September 30, 2019 excludes 2 million shares 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)
24. 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, 2019.

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
September 30, 2020 ($ in millions) Level 1 Level 2 Level 3 Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities $ 78      78 
Obligations of states and political subdivisions securities   17    17 
Mortgage-backed securities:

Agency residential mortgage-backed securities   12,603    12,603 
Agency commercial mortgage-backed securities   17,750    17,750 
Non-agency commercial mortgage-backed securities   3,575    3,575 
Asset-backed securities and other debt securities   2,871    2,871 
Available-for-sale debt and other securities(a)
78  36,816    36,894 
Trading debt securities:

U.S. Treasury and federal agency securities 64  20    84 
Obligations of states and political subdivisions securities   39    39 
Agency residential mortgage-backed securities   46    46 
Asset-backed securities and other debt securities   535    535 
Trading debt securities 64  640    704 
Equity securities 258  19    277 
Residential mortgage loans held for sale   1,472    1,472 
Residential mortgage loans(b)
    174  174 
Servicing rights     660  660 
Derivative assets:
Interest rate contracts 2  2,466  92  2,560 
Foreign exchange contracts   179    179 
Commodity contracts 59  424    483 
Derivative assets(c)
61  3,069  92  3,222 
Total assets $ 461  42,016  926  43,403 
Liabilities:

Derivative liabilities:

Interest rate contracts $ 10  288  8  306 
Foreign exchange contracts   136    136 
Equity contracts     188  188 
Commodity contracts 63  425    488 
Derivative liabilities(d)
73  849  196  1,118 
Short positions:

U.S. Treasury and federal agency securities 88      88 
Asset-backed securities and other debt securities   421    421 
Short positions(d)
88  421    509 
Total liabilities $ 161  1,270  196  1,627 
(a)Excludes FHLB, FRB and DTCC restricted stock holdings totaling $47, $482 and $2, respectively, at September 30, 2020.
(b)Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c)Included in other assets in the Condensed Consolidated Balance Sheets.
(d)Included in other liabilities in the Condensed Consolidated Balance Sheets.
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Fair Value Measurements Using
December 31, 2019 ($ in millions) Level 1 Level 2 Level 3 Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities $ 75  —  —  75 
Obligations of states and political subdivisions securities —  18  —  18 
Mortgage-backed securities:

Agency residential mortgage-backed securities —  14,115  —  14,115 
Agency commercial mortgage-backed securities —  15,693  —  15,693 
Non-agency commercial mortgage-backed securities —  3,365  —  3,365 
Asset-backed securities and other debt securities —  2,206  —  2,206 
Available-for-sale debt and other securities(a)
75  35,397  —  35,472 
Trading debt securities:

U.S. Treasury and federal agency securities —  — 
Obligations of states and political subdivisions securities —  — 
Agency residential mortgage-backed securities —  55  —  55 
Asset-backed securities and other debt securities —  231  —  231 
Trading debt securities 295  —  297 
Equity securities 554  10  —  564 
Residential mortgage loans held for sale —  1,264  —  1,264 
Residential mortgage loans(b)
—  —  183  183 
Servicing rights —  —  993  993 
Derivative assets:

Interest rate contracts 1,218  18  1,237 
Foreign exchange contracts —  165  —  165 
Commodity contracts 37  234  —  271 
Derivative assets(c)
38  1,617  18  1,673 
Total assets $ 669  38,583  1,194  40,446 
Liabilities:

Derivative liabilities:

Interest rate contracts $ 144  157 
Foreign exchange contracts —  151  —  151 
Equity contracts —  —  163  163 
Commodity contracts 17  253  —  270 
Derivative liabilities(d)
22  548  171  741 
Short positions:

U.S. Treasury and federal agency securities 49  —  —  49 
Asset-backed securities and other debt securities —  100  —  100 
Short positions(d)
49  100  —  149 
Total liabilities $ 71  648  171  890 
(a)Excludes FHLB, FRB and DTCC restricted stock holdings totaling $76, $478 and $2, respectively, at December 31, 2019.
(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, quoted prices of securities with similar characteristics or DCFs. Level 2 securities may include federal agency 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
Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy. 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 classified within Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related 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 14 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 September 30, 2020 and December 31, 2019, 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 19 for additional information on the Covered Litigation.

The net asset fair value of the IRLCs at September 30, 2020 was $85 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 $15 million and $29 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the IRLCs of approximately $16 million and $35 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 $9 million and $17 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 $9 million and $17 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, quoted prices of securities with similar characteristics or DCFs 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 September 30, 2020 ($ in millions)
Residential
Mortgage
Loans
Servicing
Rights
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives
Total
Fair Value
Balance, beginning of period $ 185  676  89  (183) 767 
Total (losses) gains (realized/unrealized):(d)
 Included in earnings   (71) 55  (22) (38)
Purchases/originations   55      55 
Settlements (21)   (60) 17  (64)
Transfers into Level 3(b)
10        10 
Balance, end of period $ 174  660  84  (188) 730 
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 September 30, 2020(c)
$   (2) 61  (22) 37 
(a)Net interest rate derivatives include derivative assets and liabilities of $92 and $8, respectively, as of September 30, 2020.
(b)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
(c)Includes interest income and expense.
(d)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at September 30, 2020.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the three months ended September 30, 2019 ($ in millions)
Residential
Mortgage
Loans
Servicing
Rights
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives
Total
Fair Value
Balance, beginning of period $ 192  1,039  (151) 1,085 
Total (losses) gains (realized/unrealized):
 Included in earnings —  (171) 51  (11) (131)
Purchases/originations —  42  (1) —  41 
Settlements (11) —  (40) 16  (35)
Transfers into Level 3(b)
—  —  — 
Balance, end of period $ 184  910  15  (146) 963 
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 September 30, 2019(c)
$ —  (131) 24  (11) (118)
(a)Net interest rate derivatives include derivative assets and liabilities of $24 and $9, respectively, as of September 30, 2019.
(b)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
(c)Includes interest income and expense.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
For the nine months ended September 30, 2020 ($ in millions)
Residential
Mortgage
Loans
Servicing
Rights
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives
Total
Fair Value
Balance, beginning of period $ 183  993  10  (163) 1,023 
Total (losses) gains (realized/unrealized):(d)
 Included in earnings 2  (519) 241  (73) (349)
Purchases/originations   186  4    190 
Settlements (50)   (171) 48  (173)
Transfers into Level 3(b)
39        39 
Balance, end of period $ 174  660  84  (188) 730 
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 September 30, 2020(c)
$ 2  (281) 88  (73) (264)
(a)Net interest rate derivatives include derivative assets and liabilities of $92 and $8, respectively, as of September 30, 2020.
(b)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
(c)Includes interest income and expense.
(d)There were no unrealized gains or losses for the period included in other comprehensive income for instruments still held at September 30, 2020.
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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 nine months ended September 30, 2019 ($ in millions)
Residential
Mortgage
Loans
Servicing
Rights
Interest Rate
Derivatives,
Net(a)
Equity
Derivatives
Total
Fair Value
Balance, beginning of period $ 179  938  (1) (125) 991 
Total (losses) gains (realized/unrealized):
 Included in earnings (1) (416) 110  (63) (370)
Purchases/originations/acquisitions —  388  (3) —  385 
Settlements (22) —  (91) 42  (71)
Transfers into Level 3(b)
28  —  —  —  28 
Balance, end of period $ 184  910  15  (146) 963 
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 September 30, 2019(c)
$ (1) (329) 25  (63) (368)
(a)Net interest rate derivatives include derivative assets and liabilities of $24 and $9, respectively, as of September 30, 2019.
(b)Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
(c)Includes interest income and expense.

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
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Mortgage banking net revenue $ (17) (121) (278) (309)
Commercial banking revenue 1  1 
Other noninterest income (22) (11) (72) (63)
Total losses $ (38) (131) (349) (370)

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 September 30, 2020 and 2019 were recorded in the Condensed Consolidated Statements of Income as follows:
For the three months ended
September 30,
For the nine months ended
September 30,
($ in millions) 2020 2019 2020 2019
Mortgage banking net revenue $ 58  (109) (193) (307)
Commercial banking revenue 1  1 
Other noninterest income (22) (11) (72) (63)
Total (losses) gains $ 37  (118) (264) (368)

142


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables present information as of September 30, 2020 and 2019 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 September 30, 2020 ($ in millions)
Financial Instrument Fair Value Valuation
Technique
Significant Unobservable
Inputs
Range of Inputs
Weighted-Average
Residential mortgage loans $ 174  Loss rate model Interest rate risk factor (8.6) - 11.0% 1.1  %
(a)
Credit risk factor   - 26.0% 0.4  %
(a)
(Fixed)
18.2  %
(b)
Servicing rights 660  DCF Prepayment speed 0.5  - 99.9%
(Adjustable)
21.2  %
(b)
(Fixed)
918 
(b)
OAS (bps) 536  - 1,537
(Adjustable)
938 
(b)
IRLCs, net 85  DCF Loan closing rates 7.2  - 97.2% 61.4  %
(c)
Swap associated with the sale of Visa, Inc. Class B Shares
(188) DCF Timing of the resolution
of the Covered Litigation
Q3 2022 - Q2 2024 Q1 2023
(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 September 30, 2019 ($ in millions)
Financial Instrument Fair Value Valuation
Technique
Significant
Unobservable Inputs
Range of Inputs Weighted-Average
Residential mortgage loans $ 184  Loss rate model Interest rate risk factor (6.8) - 6.9 % (0.2) %
Credit risk factor —  - 31.8 % 0.5  %
(Fixed) 15.4  %
Servicing rights 910  DCF Prepayment speed 0.5  - 97.0 % (Adjustable) 23.4  %
(Fixed) 619 
OAS (bps) 484 - 1,513 (Adjustable) 914 
IRLCs, net 24  DCF Loan closing rates 5.7  - 96.7 % 76.9  %
Swap associated with the sale of Visa, Inc. Class B Shares
(146) DCF Timing of the resolution
of the Covered Litigation
Q2 2021 - Q4 2023 Q1 2022

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 September 30, 2020 and 2019, and for which a nonrecurring fair value adjustment was recorded during the three and nine months ended September 30, 2020 and 2019, 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) Gains
As of September 30, 2020 ($ in millions) Level 1 Level 2 Level 3 Total
For the three months ended September 30, 2020
For the nine months ended September 30, 2020
Commercial loans held for sale $   31  17  48  1  (4)
Commercial and industrial loans     534  534  (39) (182)
Commercial mortgage loans     82  82  (12) (45)
Commercial leases     12  12  2  (14)
Consumer loans     197  197  (1) 2 
OREO     20  20  (2) (7)
Bank premises and equipment     21  21  (11) (25)
Operating lease equipment     9  9    (3)
Private equity investments     69  69    (9)
Total $   31  961  992  (62) (287)
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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 September 30, 2019 ($ in millions) Level 1 Level 2 Level 3 Total
For the three months ended September 30, 2019
For the nine months ended September 30, 2019
Commercial and industrial loans $ —  —  116  116  (11) (45)
Commercial mortgage loans —  —  12  12  —  — 
Commercial leases —  —  18  18  (9)
OREO —  —  16  16  (2) (5)
Bank premises and equipment —  —  23  23  (4) (26)
Private equity investments —  — 
Total $ —  187  193  (15) (79)

The following tables present information as of September 30, 2020 and 2019 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:
As of September 30, 2020 ($ in millions)
Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of
Inputs
Weighted-Average
Commercial loans held for sale $ 16  Comparable company analysis Market comparable transactions NM NM
1  Appraised value Appraised value NM NM
Commercial and industrial loans 534  Appraised value Collateral value NM NM
Commercial mortgage loans 82  Appraised value Collateral value NM NM
Commercial leases 12  Appraised value Collateral value NM NM
Consumer loans 197  Appraised value Collateral value NM NM
OREO 20  Appraised value Appraised value NM NM
Bank premises and equipment 21  Appraised value Appraised value NM NM
Operating lease equipment 9  Appraised value Appraised value NM NM
Private equity investments 69  Comparable company analysis Market comparable transactions NM NM

As of September 30, 2019 ($ in millions)
Financial Instrument Fair Value Valuation Technique Significant Unobservable Inputs Ranges of
Inputs
Weighted-Average
Commercial and industrial loans $ 116  Appraised value Collateral value NM NM
Commercial mortgage loans 12  Appraised value Collateral value NM NM
Commercial leases 18  Appraised value Collateral value NM NM
OREO 16  Appraised value Appraised value NM NM
Bank premises and equipment 23  Appraised value Appraised value NM NM
Private equity investments Comparable company analysis Market comparable transactions NM NM

Commercial loans held for sale
The Bancorp estimated the fair value of certain commercial loans held for sale as of September 30, 2020, resulting in a positive fair value adjustment totaling $1 million and negative fair value adjustments totaling $4 million during the three and nine months ended September 30, 2020, respectively. These valuations were based on quoted prices for similar assets in active markets (Level 2 of the valuation hierarchy), 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). The Bancorp recognized an immaterial amount of gains on the sale of certain commercial loans held for sale during both the three and nine months ended September 30, 2020.

Portfolio loans and leases
During the three and nine months ended September 30, 2020 and 2019, the Bancorp recorded nonrecurring impairment adjustments to certain collateral-dependent portfolio loans and leases. When the 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 carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous tables.

OREO
During the three and nine months ended September 30, 2020 and 2019, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring
144


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
losses were primarily due to declines in real estate values of the properties recorded in OREO. These losses include $2 million and $3 million in losses, respectively, recorded as charge-offs on new OREO properties transferred from loans, during the three and nine months ended September 30, 2020 compared to $1 million and $2 million in losses during the three and nine months ended September 30, 2019, respectively. These losses also included an immaterial amount and $4 million for the three and nine months ended September 30, 2020, respectively, and $1 million and $3 million for the three and nine months ended September 30, 2019, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Condensed Consolidated Statements of Income subsequent to their transfer from loans. As discussed in the following paragraph, 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.

The Real Estate Valuation department reviews the BPO data and internal market information to determine the initial charge-off on residential real estate loans transferred to OREO. Once the foreclosure process is completed, the Bancorp performs an interior inspection to update the initial fair value of the property. These properties are reviewed at least every 30 days after the initial interior inspections are completed. The Asset Manager receives a monthly status report for each property, which includes the number of showings, recently sold properties, current comparable listings and overall market conditions.

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 8.

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 resulting from observable price changes during the three and nine months ended September 30, 2020 and recognized gains of zero and $11 million, respectively, resulting from observable price changes during the three and nine months ended September 30, 2019. The carrying value of the Bancorp’s private equity investments still held as of September 30, 2020 includes a cumulative $47 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 of zero and $9 million for the three and nine months ended September 30, 2020, respectively, compared to zero and $5 million for the three and nine months ended September 30, 2019, respectively. The Bancorp recognized an immaterial amount of gains on the sale of certain private equity investments that previously recognized an impairment. The carrying value of the Bancorp’s private equity investments still held as of September 30, 2020 includes a cumulative $25 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
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
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 September 30, 2020 and 2019 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $77 million and $35 million, respectively. These gains 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 $1 million at both September 30, 2020 and December 31, 2019. 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.

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:
September 30, 2020 ($ in millions)
Aggregate
Fair Value
Aggregate Unpaid
Principal Balance

Difference
Residential mortgage loans measured at fair value
$ 1,646  1,569  77 
Past due loans of 90 days or more
3  3   
Nonaccrual loans
     
December 31, 2019

Residential mortgage loans measured at fair value
$ 1,447  1,410  37 
Past due loans of 90 days or more
— 
Nonaccrual loans
— 

Fair Value of Certain Financial Instruments
The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis:
Net Carrying
Amount
Fair Value Measurements Using Total
Fair Value
As of September 30, 2020 ($ in millions) Level 1 Level 2 Level 3
Financial assets:
Cash and due from banks $ 2,996  2,996      2,996 
Other short-term investments 31,285  31,285      31,285 
Other securities 531    531    531 
Held-to-maturity securities 15      15  15 
Loans and leases held for sale 851      851  851 
Portfolio loans and leases:

Commercial and industrial loans 50,673      50,465  50,465 
Commercial mortgage loans 10,505      10,366  10,366 
Commercial construction loans 5,551      5,711  5,711 
Commercial leases 2,988      2,868  2,868 
Residential mortgage loans 15,687      17,240  17,240 
Home equity 5,244      5,645  5,645 
Indirect secured consumer loans 12,797      12,704  12,704 
Credit card 1,802      1,952  1,952 
Other consumer loans 2,736      2,941  2,941 
Total portfolio loans and leases, net $ 107,983      109,892  109,892 
Financial liabilities:

Deposits $ 156,683    156,697    156,697 
Federal funds purchased 251  251      251 
Other short-term borrowings 1,196    1,196    1,196 
Long-term debt 15,123  15,651  950    16,601 
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Net Carrying
Amount
Fair Value Measurements Using Total
Fair Value
As of December 31, 2019 ($ in millions) Level 1 Level 2 Level 3
Financial assets:
Cash and due from banks $ 3,278  3,278  —  —  3,278 
Other short-term investments 1,950  1,950  —  —  1,950 
Other securities 556  —  556  —  556 
Held-to-maturity securities 17  —  —  17  17 
Loans and leases held for sale 136  —  —  136  136 
Portfolio loans and leases:
Commercial and industrial loans 49,981  —  —  51,128  51,128 
Commercial mortgage loans 10,876  —  —  10,823  10,823 
Commercial construction loans 5,045  —  —  5,249  5,249 
Commercial leases 3,346  —  —  3,133  3,133 
Residential mortgage loans 16,468  —  —  17,509  17,509 
Home equity 6,046  —  —  6,315  6,315 
Indirect secured consumer loans 11,485  —  —  11,331  11,331 
Credit card 2,364  —  —  2,774  2,774 
Other consumer loans 2,683  —  —  2,866  2,866 
Unallocated ALLL (121) —  —  —  — 
Total portfolio loans and leases, net $ 108,173  —  —  111,128  111,128 
Financial liabilities:
Deposits $ 127,062  —  127,059  —  127,059 
Federal funds purchased 260  260  —  —  260 
Other short-term borrowings 1,011  —  1,011  —  1,011 
Long-term debt 14,970  15,244  700  —  15,944 
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Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
25. Business Segments
The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending 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 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 have declined since December 31, 2019 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 declined due to lower interest rates and modified assumptions. Thus, net interest income for asset-generating business segments improved while deposit-providing business segments were negatively impacted during the nine months ended September 30, 2020.

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

The following is a description of each of the Bancorp’s business segments and the products and services they provide to their respective client bases.

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.

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,122 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

Consumer Lending includes the Bancorp’s residential mortgage, automobile and other indirect lending activities. Residential mortgage activities within Consumer Lending include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans and all associated hedging activities. Residential mortgages are primarily originated through a dedicated sales force and through third-party correspondent lenders. Automobile and other indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers.

Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to the institutional marketplace. Fifth Third Insurance Agency assists clients with their financial and risk management needs. Fifth Third Private Bank offers wealth management strategies to high net worth and ultra-high net worth clients through wealth planning, investment management, banking, insurance, trust and estate services. Fifth Third Institutional Services provides advisory services for institutional clients, including middle market businesses, nonprofits, states and municipalities.
148


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:
September 30, 2020 ($ in millions) Commercial
Banking
Branch
Banking
Consumer
Lending
Wealth
and Asset
Management
General
Corporate
and Other
Eliminations Total
Net interest income $ 432  355  98  28  257    1,170 
(Benefit from) provision for credit losses 337  68  2    (422)   (15)
Net interest income after (benefit from) provision for credit losses
95 

287  96  28  679 

 

1,185 
Noninterest income:

Service charges on deposits 91  53          144 
Wealth and asset management revenue 1  44    126    (39)
(a)
132 
Commercial banking revenue 125  1      (1)   125 
Mortgage banking net revenue   2  72  2      76 
Card and processing revenue 13  76      3    92 
Leasing business revenue 77            77 
Other noninterest income(b)
11  16  2  4  (7)   26 
Securities gains, net         51    51 
Securities losses, net non-qualifying hedges on MSRs
    (1)       (1)
Total noninterest income 318 

192  73  132  46 

(39)

722 
Noninterest expense:

Compensation and benefits 127  162  57  54  237    637 
Technology and communications 3  1  2    83    89 
Net occupancy expense(d)
8  44  2  3  33    90 
Leasing business expense 35            35 
Equipment expense 6  10      17    33 
Card and processing expense 2  28      (1)   29 
Marketing expense 2  6  1    14    23 
Other noninterest expense 228  209  75  76  (324) (39) 225 
Total noninterest expense 411 

460  137  133  59 

(39)

1,161 
Income before income taxes 2  19  32  27  666    746 
Applicable income tax expense (benefit) (10) 4  7  6  158    165 
Net income 12 

15  25  21  508 

 

581 
Total goodwill $ 1,961  2,047    253      4,261 
Total assets $ 72,025  77,018  27,869  11,520  13,564 
(c)
  201,996 
(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 $11 for branches and land. For more information, refer to Note 8 and Note 24.
(c)Includes bank premises and equipment of $45 classified as held for sale. For more information, refer to Note 8.
(d)Includes impairment losses and termination charges of $1 for ROU assets related to certain operating leases. For more information, refer to Note 10.

149


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019 ($ in millions) Commercial
Banking
Branch
Banking
Consumer
Lending
Wealth
and Asset
Management
General
Corporate
and Other
Eliminations Total
Net interest income $ 623  598  88  44  (111) —  1,242 
Provision for credit losses 54  58  14  —  —  134 
Net interest income after provision for credit losses 569  540  74  44  (119)

—  1,108 
Noninterest income:

Service charges on deposits 79  65  —  —  (1) —  143 
Wealth and asset management revenue 41  —  119  —  (37)
(a)
124 
Commercial banking revenue 122  —  —  —  —  123 
Mortgage banking net revenue —  92  —  —  95 
Card and processing revenue 16  74  —  —  94 
Leasing business revenue 92  —  —  —  —  —  92 
Other noninterest income(b)
25  21  10  —  64 
Securities gains, net —  —  —  —  — 
Securities gains, net non-qualifying hedges on MSRs
—  —  —  —  —  —  — 
Total noninterest income 335  204  96  125  17 

(37)

740 
Noninterest expense:

Compensation and benefits 118  148  48  51  219  —  584 
Technology and communications —  94  —  100 
Net occupancy expense 44  27  —  84 
Leasing business expense 40  —  —  —  —  —  40 
Equipment expense 12  —  —  14  —  33 
Card and processing expense 32  —  —  (1) —  33 
Marketing expense 17  18  —  40 
Other noninterest expense 245  215  60  74  (312) (37) 245 
Total noninterest expense 425  469  114  129  59 

(37) 1,159 
Income (loss) before income taxes 479  275  56  40  (161) —  689 
Applicable income tax expense (benefit) 86  58  12  (24) —  140 
Net income (loss) 393  217  44  32  (137)

—  549 
Total goodwill $ 1,982  2,054  —  254  — 

—  4,290 
Total assets $ 75,143  69,021  26,171  9,961  (9,217)
(c)
—  171,079 
(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 $5 for branches and land. For more information, refer to Note 8 and Note 24.
(c)Includes bank premises and equipment of $87 classified as held for sale. For more information, refer to Note 8.

150


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 nine months ended:
September 30, 2020 ($ in millions) Commercial
Banking
Branch
Banking
Consumer
Lending
Wealth
and Asset
Management
General
Corporate
and Other
Eliminations Total
Net interest income $ 1,512  1,372  279  116  321    3,600 
Provision for credit losses 839  182  25    64    1,110 
Net interest income after provision for credit losses 673 

1,190  254  116  257 

 

2,490 
Noninterest income:

Service charges on deposits 253  160    1      414 
Wealth and asset management revenue 2  128    371    (114)
(a)
387 
Commercial banking revenue 386  3    1  (3)   387 
Mortgage banking net revenue   6  286  3      295 
Card and processing revenue 40  209    1  10    260 
Leasing business revenue 207 
(c)
          207 
Other noninterest income(b)
9  49  8  13  (37)   42 
Securities gains, net         48    48 
Securities gains, net non-qualifying hedges on MSRs
    3        3 
Total noninterest income 897 

555  297  390  18 

(114)

2,043 
Noninterest expense:

Compensation and benefits 405  491  162  165  688    1,911 
Technology and communications 10  2  6  1  253    272 
Net occupancy expense(e)
23  131  7  9  84    254 
Leasing business expense 103            103 
Equipment expense 20  31      46    97 
Card and processing expense 6  86      (3)   89 
Marketing expense 5  23  3  2  41    74 
Other noninterest expense 722  635  204  223  (988) (114) 682 
Total noninterest expense 1,294 

1,399  382  400  121 

(114)

3,482 
Income before income taxes 276  346  169  106  154    1,051 
Applicable income tax expense 27  73  35  22  71    228 
Net income 249 

273  134  84  83 

 

823 
Total goodwill $ 1,961  2,047    253      4,261 
Total assets $ 72,025  77,018  27,869  11,520  13,564 
(d)
  201,996 
(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 $25 for branches and land. For more information, refer to Note 8 and Note 24.
(c)Includes impairment charges of $3 for operating lease equipment. For more information, refer to Note 9 and Note 24.
(d)Includes bank premises and equipment of $45 classified as held for sale. For more information, refer to Note 8.
(e)Includes impairment losses and termination charges of $6 for ROU assets related to certain operating leases. For more information, refer to Note 10.
151


Fifth Third Bancorp and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019 ($ in millions) Commercial
Banking
Branch
Banking
Consumer
Lending
Wealth
and Asset
Management
General
Corporate
and Other
Eliminations Total
Net interest income $ 1,761  1,802  234  141  (369) —  3,569 
Provision for credit losses 100  164  34  —  12  —  310 
Net interest income after provision for credit losses 1,661  1,638  200  141  (381)

—  3,259 
Noninterest income:

Service charges on deposits 227  191  —  (2) —  417 
Wealth and asset management revenue 117  —  345  —  (106)
(a)
358 
Commercial banking revenue 329  —  —  —  333 
Mortgage banking net revenue —  209  —  —  214 
Card and processing revenue 49  212  —  —  266 
Leasing business revenue 199  —  —  —  —  —  199 
Other noninterest income(b)
55  63  10  542  —  679 
Securities gains, net —  —  —  —  30  —  30 
Securities gains, net non-qualifying hedges on MSRs
—  —  —  —  — 
Total noninterest income 861  590  224  359  573 

(106)

2,501 
Noninterest expense:

Compensation and benefits 346  444  146  165  742  —  1,843 
Technology and communications 301  —  319 
Net occupancy expense 21  130  10  79  —  248 
Leasing business expense 97  —  —  —  —  —  97 
Equipment expense 18  35  —  42  —  96 
Card and processing expense 92  —  (1) —  98 
Marketing expense 49  56  —  117 
Other noninterest expense 696  622  172  216  (919) (106) 681 
Total noninterest expense 1,198  1,375  335  397  300 

(106) 3,499 
Income (loss) before income taxes 1,324  853  89  103  (108) —  2,261 
Applicable income tax expense 242  179  19  22  21  —  483 
Net income (loss) 1,082  674  70  81  (129)

—  1,778 
Total goodwill $ 1,982  2,054  —  254  — 

—  4,290 
Total assets $ 75,143  69,021  26,171  9,961  (9,217)
(c)
—  171,079 
(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 $27 for branches and land. For more information, refer to Note 8 and Note 24.
(c)Includes bank premises and equipment of $87 classified as held for sale. For more information, refer to Note 8.

152

PART II. OTHER INFORMATION

Legal Proceedings (Item 1)
Refer to Note 20 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 Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated by the Registrant’s subsequent Quarterly Reports on Form 10-Q:

Fifth Third could suffer from unauthorized use of intellectual property
Fifth Third develops for itself, and licenses from others, intellectual property for use in conducting its business. This intellectual property has been, and may be, subject to misappropriation or infringement by third parties as well as claims that Fifth Third’s use of certain technology or other intellectual property infringes on rights owned by others. Fifth Third has been, and may be, subject to disputes and/or litigation concerning these claims and could be held responsible for significant damages covering past activities and substantial fees to continue to engage in these activities in the future. Fifth Third may also be unable to acquire rights to use certain intellectual property that is important for its business and may be unable to effectively engage in critical business activities. If Fifth Third is unable to protect or acquire rights to use intellectual property it owns or licenses it may lose certain competitive advantages, incur expenses and/or lose revenue and may suffer harm to its business results and 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 third quarter of 2020.

Defaults Upon Senior Securities (Item 3)
None.

Mine Safety Disclosures (Item 4)
Not applicable.

Other Information (Item 5)
None.
153

Table of Contents
Exhibits (Item 6)
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
10.1
10.2
31(i)
31(ii)
32(i)
32(ii)
101.INS Inline XBRL Instance Document (filed herewith).
101.SCH Inline XBRL Taxonomy Extension Schema (filed herewith).
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith).
101.LAB Inline XBRL Taxonomy Extension Label Linkbase (filed herewith).
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith).
101.DEF Inline XBRL Taxonomy Definition Linkbase (filed herewith).
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
154

Table of Contents
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: November 5, 2020
/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer & Principal Financial Officer)
155


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 

Exhibit 31(i)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Greg D. Carmichael, certify that:

1.    I have reviewed this report on Form 10-Q of Fifth Third Bancorp (the “Registrant”);

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.    The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
    a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)    Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

    d)    Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.    The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

    a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

    b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.


/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman and Chief Executive Officer
November 5, 2020


Exhibit 31(ii)
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Tayfun Tuzun, certify that:

1.    I have reviewed this report on Form 10-Q of Fifth Third Bancorp (the “Registrant”);

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.    The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

    a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

    b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

    c)    Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.    The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

    a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

    b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.


/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and
Chief Financial Officer
November 5, 2020


Exhibit 32(i)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Fifth Third Bancorp (the “Registrant”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg D. Carmichael, Chairman and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Greg D. Carmichael
Greg D. Carmichael
Chairman and Chief Executive Officer
November 5, 2020


Exhibit 32(ii)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Fifth Third Bancorp (the “Registrant”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tayfun Tuzun, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Tayfun Tuzun
Tayfun Tuzun
Executive Vice President and
Chief Financial Officer
November 5, 2020