MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS OF INCOME ANALYSIS  Net Interest Income  Net interest income is the interest earned on debt securities, loans  and leases (including yield-related fees) and other interest-earning  assets less the interest paid for core deposits (includes transaction  deposits and other time deposits) and wholesale funding (includes  certificates $100,000 and over, other deposits, federal funds  purchased, short-term borrowings and long-term debt). The net  interest margin is calculated by dividing net interest income by  average interest-earning assets. Net interest rate spread is the  difference between the average rate earned on interest-earning  assets and the average rate paid on interest-bearing liabilities. Net  interest margin is typically greater than net interest rate spread due  to the interest income earned on those assets that are funded by  non-interest-bearing liabilities, or free-funding, such as demand  deposits or shareholders’ equity.  on new term deposits. In addition, 2010 benefitted from a $3.2  billion increase in the free funding position. This benefit was  partially offset by a $2.6 billion decrease in average interest  earning assets from 2009. The shift in funding position, as well as  improved pricing on commercial loans, led to a 39 bp increase in  the net interest rate spread to 3.39% in 2010 compared to 2009.  Net interest margin was 3.66% in 2010, compared to 3.32%  in 2009. For 2010 and 2009, the accretion of the discounts on  acquired loans and deposits increased the net interest margin by 7  bp and 14 bp, respectively. Excluding the accretion of discounts  on acquired loans and deposits, net interest margin was up 41 bp  from 2009, driven by improved pricing on new commercial loan  originations, the shift in funding composition to lower cost core  deposits, an increase in free-funding balances and a decrease in  the average rates paid on interest bearing liabilities. Average interest-earning assets decreased three percent from  2009. Average commercial loans decreased $3.9 billion due to  decreases across all commercial loan categories, and average  consumer loans decreased $239 million due primarily to decreases  in average residential mortgage, home equity and other consumer  loans and leases, partially offset by an increase in average  automobile loans. In addition, average investment securities  decreased $729 million, or four percent, compared to 2009. The  declines in average loans and investment securities were partially  offset by a $2.3 billion increase in average other short-term  investments, which includes interest bearing cash held at the  Federal Reserve. For further discussion on the Bancorp’s loan and  lease and investment securities portfolios, see the Loan and Lease  and Investment Securities sections, respectively, of MD&A. Interest income from loans and leases decreased $112 million  compared to 2009. Excluding the accretion of discounts on  acquired loans in 2010 and 2009, interest income from loans and  leases decreased $46 million, or one percent, compared to the  prior year. The year-over-year decrease in interest income from  loans and leases is a result of a five percent decline in average  balances, partially offset by an 11 bp increase in the average yield.  Interest income from investment securities decreased nine percent  compared to 2009 due to a 68 bp decrease in the weighted- average yield and a four percent decline in average balances.  Average interest-bearing core deposits increased $4.0 billion,  or eight percent, compared to 2009, primarily due to increased  interest checking, savings, money market and foreign office  deposits, partially offset by a decline in other time deposits. The  cost of interest-bearing core deposits was 0.83% in 2010; a  decrease of 45 bp from 2009. The decrease is a result of a mix  Table 5 presents the components of net interest income, net  interest margin and net interest spread for 2010, 2009 and 2008.  Nonaccrual loans and leases and loans held for sale have been  included in the average loan and lease balances. Average  outstanding securities balances are based on amortized cost with  any unrealized gains or losses on available-for-sale securities  included in other assets. Table 6 provides the relative impact of  changes in the balance sheet and changes in interest rates on net  interest income.  Net interest income was $3.6 billion for the year ended  December 31, 2010, compared to $3.4 billion in 2009. Net interest  income was affected by the amortization and accretion of  premiums and discounts on acquired loans and deposits, primarily  from the acquisition of First Charter that increased net interest  income by $68 million during 2010, compared to an increase of  $136 million during 2009. Excluding this impact, net interest  income increased $317 million, or 10%, in 2010 compared to  2009. The purchase accounting accretion reflects the high  discount rate in the market at the time of the acquisition; the total  loan discounts are being accreted into net interest income over the  remaining period to maturity of the loans acquired. Based upon  the remaining period to maturity, and excluding the impact of  prepayments, the Bancorp anticipates recognizing approximately  $41 million in additional net interest income during 2011 as a  result of the amortization and accretion of premiums and  discounts on acquired loans and deposits. For the year ended December 31, 2010, net interest income  was positively impacted by a decrease of $5.6 billion in average  interest-bearing liabilities as well as a mix shift to lower cost core  deposits from 2009. This was primarily a result of runoff of higher  priced term deposits as well as the benefit of lower rates offered  TABLE 4: CONDENSED CONSOLIDATED STATEMENTS OF INCOME  For the years ended December 31 ($ in millions, except per share data)  2010 2009 2008 2007 2006 Interest income (FTE)  $4,507 4,687 5,630 6,051 5,981 Interest expense  885 1,314 2,094 3,018 3,082 Net interest income (FTE)  3,622 3,373 3,536 3,033 2,899 Provision for loan and lease losses  1,538 3,543 4,560 628 343 Net interest income (loss) after provision for loan and lease losses (FTE)  2,084 (170) (1,024) 2,405 2,556 Noninterest income  2,729 4,782 2,946 2,467 2,012 Noninterest expense  3,855 3,826 4,564 3,311 2,915 Income (loss) before income taxes and cumulative effect (FTE)  958 786 (2,642) 1,561 1,653 Fully taxable equivalent adjustment  18 19 22 24 26 Applicable income tax expense (benefit)  187 30 (551) 461 443 Income (loss) before cumulative effect  753 737 (2,113) 1,076 1,184 Cumulative effect of change in accounting principle, net of tax  - - - - 4 Net income (loss) 753 737 (2,113) 1,076 1,188 Less: Net income attributable to noncontrolling interest  - - - - - Net income (loss) attributable to Bancorp  753 737 (2,113) 1,076 1,188 Dividends on preferred stock  250 226 67 1 - Net income (loss) available to common shareholders  $503 511 (2,180) 1,075 1,188 Earnings per share  $0.63 0.73 (3.91) 1.99 2.13 Earnings per diluted share 0.63 0.67 (3.91) 1.98 2.12 Cash dividends declared per common share 0.04 0.04 0.75 1.70 1.58  Fifth ThirdBancorp 29 