MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Legislative Developments  Earnings Summary  The Bancorp does not originate subprime mortgage loans,  does not hold credit default swaps and does not hold asset-backed  securities backed by subprime mortgage loans in its securities  Noninterest expense increased $29 million, or one percent,  compared to 2009. Noninterest expense in 2010 included $25  million in legal fees associated with the settlement of claims with  the insurance carrier on one of the Bancorp’s BOLI policies while  noninterest expense in 2009 included a $73 million reduction in  the Visa litigation reserve as well as a $55 million FDIC special  assessment charge. Total personnel costs increased $94 million, or  six percent in 2010 compared to 2009, due primarily to  investments in the sales force in 2010. In addition, charges to  representation and warranty reserves related to residential mortgage loans sold to third-parties totaled $110 million in 2010,  compared to $31 million in 2009 due to a higher volume of  repurchase demands. Partially offsetting these negative impacts  was a $123 million decrease in the provision for unfunded  commitments and letters of credit due to lower estimates of  inherent losses as the result of a decrease in delinquent loans  driven by moderation in economic conditions during 2010. In  addition, card and processing expense decreased $85 million  compared to 2009 due to the Processing Business Sale in June of  2009. Noninterest expense in 2010 and 2009 included $242  million and $269 million, respectively, of FDIC insurance and  other taxes. Noninterest income decreased 43% to $2.7 billion in 2010  compared to $4.8 billion in 2009, driven primarily by the  Processing Business Sale in the second quarter of 2009, which  resulted in a pre-tax gain of $1.8 billion, as well as a $244 million  gain related to the sale of the Bancorp’s Visa, Inc. Class B shares  in 2009. Mortgage banking net revenue increased $94 million as a  result of strong net servicing revenue and higher margins on sold  loans, partially offset by a decline in mortgage originations. Card  and processing revenue decreased 49% due to the Processing  Business Sale in the second quarter of 2009. Service charges on  deposits decreased $58 million primarily due to the impact of new  overdraft regulation and policies which resulted in a decrease in  overdraft occurrences. Investment advisory revenue increased $35  million as the result of improved market performance and sales  production that drove an increase in brokerage activity and assets  under care. Corporate banking revenue decreased two percent  largely due to decreases in international income and lease  remarketing fees, partially offset by growth in syndication and  business lending fees.  Net interest income increased to $3.6 billion, from $3.4  billion in 2009. The primary reason for the seven percent increase  in net interest income was a 39 bp increase in the net interest rate  spread due to the runoff of higher priced term deposits in 2010  and the benefit of lower rates offered on new term deposits, as  well as improved pricing on commercial loans. These benefits  were partially offset by a decrease in the accretion of purchase  accounting adjustments related to the 2008 acquisition of First  Charter, which were $68 million in 2010, compared to $136  million in 2009. Net interest margin was 3.66% in 2010, an  increase of 34 bp from 2009.  Dividends of $15 million were paid on February 2, 2011  when the Series F Preferred Stock was redeemed. The Bancorp  paid total dividends of $356 million to the U.S. Treasury while the  Series F Preferred Stock was outstanding. The Bancorp notified  the U.S. Treasury on February 17, 2011, of its intention to  negotiate for the purchase of the warrants issued to the U.S.  Treasury in connection with the CPP preferred stock investment.  On July 21, 2010, the Dodd-Frank Act was signed into law. This  act significantly changes the financial services industry and affects  the lending, deposit, investment, trading and operating activities  of financial institutions and their holding companies. The  legislation establishes a Bureau of Consumer Financial Protection,  changes the base for deposit insurance assessments, gives the  Federal Reserve the ability to regulate and limit interchange rates  charged to merchants for the use of debit cards, and excludes  certain instruments currently included in determining Tier I  regulatory capital. This act calls for federal regulatory agencies to  adopt hundreds of new rules and conduct multiple studies over  the next several years in order to implement its provisions. While  the total impact of this legislation on Fifth Third is not currently  known, the impact is expected to be substantial and may have an  adverse impact on Fifth Third’s financial performance and growth  opportunities.  The Bancorp’s net income available to common shareholders for  2010 was $503 million, or $0.63 per diluted share, which was net  of $250 million in preferred stock dividends. The Bancorp’s net  income available to common shareholders was $511 million, or  $0.67 per diluted share, for 2009, which was net of $226 million in  preferred stock dividends. The Bancorp’s results for both years  reflect a number of significant items.  Such items affecting 2010 include:  For comparison purposes, such items affecting 2009 include:  • $1.8 billion of noninterest income from the Processing  Business Sale to Advent International;  • $244 million of noninterest income from the sale of the  Bancorp’s Visa, Inc. Class B common shares and a $73  million reduction to noninterest expense from the  release of Visa litigation reserves;  • $136 million of net interest income due to the accretion  of purchase accounting adjustments related to loans and  deposits from acquisitions during 2008;  • $106 million income tax benefit from the decision to  surrender one of the Bancorp’s BOLI policies and the  determination that previously recorded losses on the  policy are tax deductible; • $31 million of noninterest expense from charges to  representation and warranty reserves related to residential mortgage loans sold to third-parties;  • $55 million of noninterest expense from a special  assessment by the FDIC;  • $152 million of noninterest income from the settlement  of litigation associated with one of the Bancorp’s BOLI  policies and $25 million of noninterest expense from  related legal fees;  • $110 million of noninterest expense from charges to  representation and warranty reserves related to residential mortgage loans sold to third-parties; and  • $68 million of net interest income due to the accretion  of purchase accounting adjustments related to loans and  deposits from acquisitions during 2008.  • $55 million income tax benefit from an agreement with  the IRS to settle all of the Bancorp’s disputed leverage  leases for all open years;  • $53 million in charges to other noninterest income  reflecting reserves recorded in connection with the  intent to surrender one of the Bancorp’s BOLI policies  as well as losses related to market value declines; and  • $35 million increase to net income available to common  shareholders from the exchange of 63% of outstanding  Series G preferred shares for approximately 60 million  common shares and $230 million in cash. Fifth Third Bancorp 17 