Edgar Filing: FIFTH THIRD BANCORP

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2007

Commission File Number 0-8076

LOGO

(Exact name of Registrant as specified in its charter)

Ohio

31-0854434

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

Registrant’s telephone number, including area code: (513) 534-5300

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 x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨

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

There were 535,235,033 shares of the Registrant’s Common Stock, without par value, outstanding as of July 31, 2007.

LOGO

INDEX


Part I. Financial Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)		3
Selected Financial Data		3
Overview		4
Recent Accounting Standards		5
Critical Accounting Policies		5
Statements of Income Analysis		8
Business Segment Review		15
Balance Sheet Analysis		21
Quantitative and Qualitative Disclosure about Market Risk (Item 3)		25
Risk Management – Overview		25
Credit Risk Management		25
Market Risk Management		30
Liquidity Risk Management		33
Capital Management		33
Off-Balance Sheet Arrangements		34
Contractual Obligations and Commitments		36
Controls and Procedures (Item 4)		37
Condensed Consolidated Financial Statements and Notes (Item 1)		38
Balance Sheets (unaudited)		38
Statements of Income (unaudited)		39
Statements of Changes in Shareholders’ Equity (unaudited)		40
Statements of Cash Flows (unaudited)		41
Notes to Condensed Consolidated Financial Statements (unaudited)		42

Part II. Other Information
Legal Proceedings (Item 1)		63
Risk Factors (Item 1A)		64
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		64
Exhibits (Item 6)		65
Signatures		66
Certifications

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. 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) general economic conditions, either national or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (3) changes in the interest rate environment reduce interest margins; (4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (5) our ability to maintain required capital levels and adequate sources of funding and liquidity; (6) changes and trends in capital markets; (7) competitive pressures among depository institutions increase significantly; (8) effects of critical accounting policies and judgments; (9) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; (10) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged; (11) ability to maintain favorable ratings from rating agencies; (12) fluctuation of Fifth Third’s stock price; (13) ability to attract and retain key personnel; (14) ability to receive dividends from its subsidiaries; (15) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (16) effects of accounting or financial results of one or more acquired entity; (17) difficulties in combining the operations of acquired entities; (18) ability to secure confidential information through the use of computer systems and telecommunications network; and (19) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the United States Securities and Exchange Commission (SEC). Copies of this filing are available at no cost on the SEC’s Web site at www.sec.gov or on Fifth Third’s web site at www.53.com. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.

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

The following is management’s discussion and analysis 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.

TABLE 1: Selected Financial Data


	For the three months ended June 30,				Percent Change		For the six months ended June 30,				Percent Change
($ in millions, except per share data)	2007			2006	Percent Change		2007			2006	Percent Change
Income Statement Data
Net interest income (a)	$	745		716	4		$	1,487		1,434	4
Noninterest income		707		655	8			1,355		1,272	7
Total revenue (a)		1,452		1,371	6			2,842		2,706	5
Provision for loan and lease losses		121		71	70			205		149	38
Noninterest expense		803		759	6			1,595		1,490	7
Net income		376		382	(2	)		735		746	(2	)

Common Share Data
Earnings per share, basic	$	.69		.69	—		$	1.35		1.34	1
Earnings per share, diluted		.69		.69	—			1.34		1.34	—
Cash dividends per common share		.42		.40	5			.84		.78	8
Book value per share		17.16		17.13	—
Dividend payout ratio		59.7	%	58.3	2			62.0	%	58.2	7

Financial Ratios
Return on average assets		1.49	%	1.45	3			1.48	%	1.43	3
Return on average equity		15.7		16.0	(2	)		15.1		15.7	(4	)
Average equity as a percent of average assets		9.53		9.09	5			9.78		9.13	7
Tangible equity		6.92		6.92	—
Net interest margin (a)		3.37		3.01	12			3.40		3.04	12
Efficiency (a)		55.3		55.3	—			56.1		55.0	2

Credit Quality
Net losses charged off	$	102		67	52		$	173		140	24
Net losses charged off as a percent of average loans and leases		.55	%	.37	49			.47	%	.40	18
Allowance for loan and lease losses as a percent of loans and leases		1.06		1.04	2
Allowance for credit losses as a percent of loans and leases (b)		1.16		1.14	2
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned		.70		.49	43

Average Balances
Loans and leases, including held for sale	$	77,048		73,093	5		$	76,458		72,367	6
Total securities and other short-term investments		11,711		22,439	(48	)		11,692		22,677	(48	)
Total assets		100,767		105,741	(5	)		99,984		105,241	(5	)
Transaction deposits (c)		49,295		49,282	—			49,029		49,116	—
Core deposits (d)		60,075		59,731	1			59,937		59,217	1
Wholesale funding (e)		27,030		32,903	(18	)		26,287		33,013	(20	)
Shareholders’ equity		9,599		9,607	—			9,783		9,604	2

Regulatory Capital Ratios
Tier I capital		8.13	%	8.56	(5	)
Total risk-based capital		10.54		10.50	—
Tier I leverage		8.76		8.38	5

(a)

Amounts presented on a fully taxable equivalent basis. The taxable equivalent adjustments for the three months ended June 30, 2007 and 2006 are $6 million and for the six months ended June 30, 2007 and 2006 are $12 million and $13 million, respectively.

(b)

The allowance for credit losses is the sum of the allowance for loan and lease losses and the reserve for unfunded commitments.

(c)

Includes demand, interest checking, savings and money market deposits.

(d)

Includes transaction deposits plus other time deposits.

(e)

Includes certificates $100,000 and over, foreign office deposits, federal funds purchased, short-term borrowings and long-term debt.

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

OVERVIEW

This overview of management’s discussion and analysis highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorp’s financial condition and results of operations.

The Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2007, the Bancorp had $101.4 billion in assets, operated 18 affiliates with 1,167 full-service Banking Centers including 106 Bank Mart^® locations open seven days a week inside select grocery stores and 2,132 Jeanie^® ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania and Missouri. The Bancorp reports on five business segments: Commercial Banking, Branch Banking, Consumer Lending, Investment Advisors and Fifth Third Processing Solutions (“FTPS”).

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. Its affiliate operating model provides a competitive advantage by keeping the decisions close to the customer and by emphasizing individual relationships. Through its affiliate operating model, individual managers from the banking center to the executive level are given the opportunity to tailor financial solutions for their customers.

The Bancorp’s revenues are fairly evenly dependent on net interest income and noninterest income. For the three months ended June 30, 2007, net interest income, on a fully taxable equivalent (“FTE”) basis, and noninterest income provided 51% and 49% of total revenue, respectively. Therefore, 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, 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 paid on liabilities such as deposits and borrowings. 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 owes 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 losses on its loan and lease portfolio as a result of changing expected cash flows caused by loan defaults and inadequate collateral, among other factors.

Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.

Noninterest income is derived primarily from electronic funds transfer (“EFT”) and merchant transaction processing fees, card interchange, fiduciary and investment management fees, corporate banking revenue, service charges on deposits and mortgage banking revenue.

In May 2007, the Bancorp announced an agreement to acquire R-G Crown Bank (“Crown”), a subsidiary of R&G Financial Corporation, which operates 30 branches in Florida and three in Augusta, Georgia. The acquisition is subject to legal and regulatory approvals and is expected to close in the fourth quarter of 2007.

Earnings Summary

The Bancorp’s net income was $376 million, or $.69 per diluted share, in the second quarter of 2007, a two percent decrease compared to $382 million, or $.69 per diluted share, for the same period last year.

Net interest income (FTE) increased four percent compared to the same period last year. Net interest margin was 3.37% in the second quarter of 2007, a decrease from 3.44% in the first quarter of 2007 and an increase from 3.01% in the same period last year. The increase from the second quarter of 2006 was largely due to the balance sheet actions taken in the fourth quarter of 2006 to improve the asset/liability profile of the Bancorp, while the sequential decrease was primarily a result of share repurchase activity during the first and second quarter of 2007 and the issuance of trust preferred securities in March of 2007.

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

Noninterest income increased eight percent and seven percent for the three and six months ended June 30, 2007, respectively, with strong growth in nearly all captions. Noninterest expense increased six percent and seven percent for the three and six months ended June 30, 2007, respectively, due to higher volume-related processing expenses, de novo branch related expenses and investment in technology.

Net charge-offs as a percent of average loans and leases were .55% in the second quarter of 2007 compared to .39% in the first quarter of 2007 and .37% in the second quarter of 2006. The increased charge-offs were primarily concentrated in the commercial, commercial and residential mortgage and home equity loan captions. At June 30, 2007, nonperforming assets as a percent of loans and leases increased to .70% from .66% at March 31, 2007 and .49% at June 30, 2006.

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System (“FRB”). As of June 30, 2007, the Tier I capital ratio was 8.13%, the Tier I leverage ratio was 8.76% and the total risk-based capital ratio was 10.54%. The Bancorp had senior debt ratings of “Aa3” with Moody’s and “A+” with Standard & Poor’s at June 30, 2007, which indicate the Bancorp’s strong capacity to meet its financial commitments. The “well-capitalized” capital ratios along with strong credit ratings provide the Bancorp with access to the capital markets.

The Bancorp continues to invest in the geographic areas that offer the best growth prospects, as it believes this investment is the most cost efficient method of expansion within its largest affiliate markets. During the second quarter of 2007, the Bancorp opened 11 net new banking centers (excluding relocations and consolidations of existing facilities).

RECENT ACCOUNTING STANDARDS

Note 2 of the Notes to Condensed Consolidated Financial Statements provides a complete discussion of the new accounting standards adopted by the Bancorp during 2007 and 2006 and the expected impact of accounting standards issued but not yet required to be adopted.

CRITICAL ACCOUNTING POLICIES

Allowance for Loan and Lease Losses

The Bancorp maintains an allowance to absorb probable loan and lease losses inherent in the portfolio. The allowance is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan and lease losses are based on the Bancorp’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. In determining the appropriate level of the allowance, the Bancorp estimates losses using a range derived from “base” and “conservative” estimates. 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.

Larger commercial loans that exhibit probable or observed credit weakness are subject to individual review. When individual loans are impaired, allowances are allocated based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bancorp. The review of individual loans includes those loans that are impaired as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral. The Bancorp evaluates the collectibility of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other commercial loans, which are not impaired and thus not subject to specific allowance allocations. The loss rates are derived from a migration analysis, which tracks the net charge-off experience sustained on loans according to their internal risk grade. The risk grading system currently utilized for allowance analysis purposes encompasses ten categories.

Homogenous loans and leases, such as consumer installment, residential mortgage and automobile leases, are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks. Allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category.

Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors that management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, credit score migration comparisons, asset quality trends, risk management and loan administration, changes in the internal lending policies and credit standards, collection practices and examination results from bank regulatory agencies and the Bancorp’s internal credit examiners.

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

The Bancorp’s current methodology for determining the allowance for loan and lease losses is based on historical loss rates, current credit grades, specific allocation on impaired commercial credits and other qualitative adjustments. Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring loss when evaluating allowances for individual loans or pools of loans.

Loans acquired by the Bancorp through a purchase business combination are evaluated for possible credit impairment. Reduction to the carrying value of the acquired loans as a result of credit impairment is recorded as an adjustment to goodwill. The Bancorp does not carry over the acquired company’s allowance for loan and lease losses nor does the Bancorp add to its existing allowance for the acquired loans as part of purchase accounting.

The Bancorp’s determination of the allowance for commercial loans is sensitive to the risk grade it assigns to these loans. In the event that 10% of commercial loans in each risk category would experience a downgrade of one risk category, the allowance for commercial loans would increase by approximately $67 million at June 30, 2007. The Bancorp’s determination of the allowance for residential and retail loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the allowance for residential and retail loans would increase by approximately $27 million at June 30, 2007. As several quantitative and qualitative factors are considered in determining the allowance for loan and lease losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for loan and lease losses. They are intended to provide insights into the impact of adverse changes in risk grades and inherent losses and do not imply any expectation of future deterioration in the risk rating or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and inherent loss rates currently assigned are appropriate.

The Bancorp’s primary market areas for lending are Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania and Missouri. When evaluating the adequacy of allowances, consideration is given to this regional geographic concentration and the closely associated effect changing economic conditions have on the Bancorp’s customers.

In the current year, the Bancorp has not substantively changed any material aspect of its overall approach to determine its allowance for loan and lease losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance for loan and lease losses.

Valuation of Securities

Securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities classified as held-to-maturity are reported at amortized cost. Available-for-sale and trading securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income, net of related deferred income taxes, on the Condensed Consolidated Balance Sheets and noninterest income in the Condensed Consolidated Statements of Income, respectively. 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. 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. Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Bancorp’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the Condensed Consolidated Statements of Income. At June 30, 2007, 98% of the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by U.S. Treasury and Government agencies, U.S. Government sponsored agencies and states and political subdivisions as well as agency mortgage-backed securities. The Bancorp believes the price movements in these securities are dependent upon the movement in market interest rates. The Bancorp’s management also maintains the intent and ability to hold securities in an unrealized loss position to the earlier of the recovery of losses or maturity.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and credit grade migration. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense.

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

Income Taxes

The Bancorp estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Bancorp conducts business. On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Condensed Consolidated Statements of Income.

Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes, interest and expenses in the Condensed Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more-likely-than-not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest and expenses in the Condensed Consolidated Balance Sheets. The Bancorp evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be significant to the operating results of the Bancorp. As of January 1, 2007, the Bancorp adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements for the impact of adopting this interpretation. As described in greater detail in Note 10 of the Notes to Condensed Consolidated Financial Statements, the Internal Revenue Service is currently challenging the Bancorp’s tax treatment of certain leasing transactions.

Valuation of Servicing Rights

When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it often retains servicing rights. Servicing rights resulting from loan sales are amortized in proportion to and over the period of estimated net servicing revenues. Servicing rights are assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and permanent impairment recognized through a write-off of the servicing asset and related valuation allowance. Key economic assumptions used in measuring any potential impairment of the servicing rights include the prepayment speeds of the underlying loans, the weighted-average life, the discount rate, the weighted-average coupon and the weighted-average default rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds.

The Bancorp monitors risk and adjusts its valuation allowance as necessary to adequately reserve for any probable impairment in the portfolio. For purposes of measuring impairment, the servicing rights are stratified based on the financial asset type and interest rates. In addition, the Bancorp obtains an independent third-party valuation of mortgage servicing rights (“MSR”) on a quarterly basis to assist management in its process. Fees received for servicing loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in noninterest income as loan payments are received. Costs of servicing loans are charged to expense as incurred.

The change in the fair value of MSRs at June 30, 2007, due to immediate 10% and 20% adverse changes in the current prepayment assumption would be approximately $26 million and $49 million, respectively, and due to immediate 10% and 20% favorable changes in the current prepayment assumption would be approximately $28 million and $58 million, respectively. The change in the fair value of the MSR portfolio at June 30, 2007, due to immediate 10% and 20% adverse changes in the discount rate assumption would be approximately $23 million and $46 million, respectively, and due to immediate 10% and 20% favorable changes in the discount rate assumption would be approximately $26 million and $54 million, respectively. Sensitivity analysis related to other consumer and commercial servicing rights is not material to the Bancorp’s Condensed Consolidated Financial Statements. These sensitivities are hypothetical and should be used with caution. As the figures indicate, change in fair value based on a 10% and 20% 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. Also, the effect of variation in a particular assumption on the fair value of the interests that continue to be held by the transferor is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Additionally, the effect of the Bancorp’s non-qualifying hedging strategy, which is maintained to lessen the impact of changes in value of the MSR portfolio, is excluded from the above analysis.

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 debt securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits plus other time deposits) and wholesale funding (includes certificates $100,000 and over, foreign office 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 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.

Net interest income (FTE) was $745 million for the second quarter of 2007, an increase of $3 million from the first quarter of 2007 and $29 million from the second quarter of 2006. The improved performance from the same quarter last year primarily resulted from the balance sheet actions in the fourth quarter of 2006, which included, among other actions, the sale of $11.3 billion of available-for-sale securities with a weighted-average yield of approximately 4.30% and repayment of $8.5 billion in wholesale borrowings at a weighted-average rate paid of 5.30%. The sequential increase in net interest income was due to increased commercial loan volumes, a modest decline in consumer deposit rates and an additional day in the quarter, which was mostly offset by the additional funding cost related to share repurchases.

Net interest margin decreased to 3.37% in the second quarter of 2007 compared to 3.44% in the first quarter of 2007, and net interest rate spread decreased 4 basis points (“bp”) from 2.72% to 2.68%. The decline in the net interest margin was primarily due to share repurchase activity of $280 million and $693 million in the first and second quarters of 2007, respectively, and the issuance of $750 million in trust preferred securities in March 2007. The second quarter net interest margin increased 36 bp from 3.01% in the prior year second quarter, and net interest rate spread increased 35 bp on a year-over-year basis. The improvement in the net interest margin and net interest rate spread from the prior year is attributable to the balance sheet actions taken in the fourth quarter of 2006. The benefit of free funding decreased 3 bp from the first quarter due primarily to the share repurchases throughout the first and second quarters. Free funding remained relatively flat compared to the second quarter of last year.

Total average interest-earning assets increased six percent on an annualized sequential basis and declined seven percent from the second quarter of 2006. The increase compared to the first quarter was the result of increases in commercial loans, automobile loans and credit cards. Average credit card balances increased 22% compared to the first quarter as the Bancorp has increased its focus on growing its credit card business within its deposit customer base. The decline compared to the prior year was the result of the sale of securities in the fourth quarter of 2006 partially offset by the five percent increase in loan growth.

The growth in average loans and leases since the second quarter of 2006 outpaced core deposit growth for the same period by $3.6 billion. For the second quarter of 2007, wholesale funding represented 37% of interest-bearing liabilities, down from 42% for the same period in the prior year primarily due to the repayment of wholesale funding as a result of the fourth quarter of 2006 sale of securities. Given the current interest rate environment, the Bancorp expects to use cash flows from its securities portfolio during 2007 to fund its loan and lease growth that is in excess of its core deposit growth.

Average core deposits increased $344 million, or one percent, compared to the second quarter last year. During the second quarter of 2007, the Bancorp continued to adjust its consumer deposit rates. The Bancorp’s strategy in adjusting rates is to move away from promotional rates towards highly competitive daily rates. As a result of this strategy, the Bancorp has maintained a relatively stable interest rate for interest checking, while increasing the interest rate paid on less liquid products such as savings and money market accounts. Interest checking balances have continued to migrate into these less liquid products. During the second quarter of 2007, interest checking balances represented 32% of the average interest-bearing core deposits, compared to 37% in the second quarter of 2006.

The cost of interest-bearing core deposits was 3.39% in the second quarter of 2007 which was relatively flat compared to 3.43% in the first quarter of 2007 and up from 3.12% in the second quarter of 2006. The increase in the cost of interest-bearing core deposits from the prior year was due to a higher short-term rate environment and mix shift from interest checking to savings, money market and certificate of deposit accounts. The relative cost advantage of interest-bearing core deposits compared to wholesale funding also remained flat at 191 bp in the second quarter for both 2007 and 2006.

Interest income (FTE) from loans and leases increased $116 million, or nine percent, compared to the second quarter of 2006. The increase resulted from the growth in average loans and leases of five percent in the second quarter of 2007 over the comparable period in 2006 as well as a 26 bp increase in average rates. The increase in average rates is due to the higher short-term rate environment at June 30, 2007. As of June 30, 2007, approximately 82% of commercial loans will mature or re-price in the next 12 months.

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

TABLE 2: Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE)


For the three months ended	June 30, 2007							June 30, 2006							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 loans	$	21,587		$	401	7.45	%	$	20,338		$	363	7.16	%	$	23		$	15		$	38
Commercial mortgage		11,030			201	7.30			9,980			176	7.08			19			6			25
Commercial construction		5,595			107	7.69			5,840			111	7.67			(4	)		—			(4	)
Commercial leases		3,678			40	4.32			3,729			47	5.03			(1	)		(6	)		(7	)

Subtotal – commercial		41,890			749	7.17			39,887			697	7.01			37			15			52
Residential mortgage loans		10,201			156	6.12			9,491			140	5.91			11			5			16
Home equity		11,886			227	7.66			11,999			220	7.36			(2	)		9			7
Automobile loans		10,552			164	6.26			9,480			133	5.62			15			16			31
Credit card		1,248			33	10.62			797			23	11.73			12			(2	)		10
Other consumer loans/leases		1,271			17	5.41			1,439			17	4.77			(2	)		2			—

Subtotal – consumer		35,158			597	6.81			33,206			533	6.44			34			30			64

Total loans and leases		77,048			1,346	7.01			73,093			1,230	6.75			71			45			116
Securities:
Taxable		11,030			137	4.98			21,642			239	4.43			(129	)		27			(102	)
Exempt from income taxes (b)		508			9	7.38			616			11	7.33			(2	)		—			(2	)
Other short-term investments		173			3	6.08			181			3	5.60			—			—			—

Total interest-earning assets		88,759			1,495	6.76			95,532			1,483	6.23			(60	)		72			12
Cash and due from banks		2,265							2,564
Other assets		10,524							8,393
Allowance for loan and lease losses		(781	)						(748	)

Total assets	$	100,767						$	105,741

Liabilities
Interest-bearing liabilities:
Interest checking	$	15,061		$	83	2.21	%	$	17,025		$	102	2.39	%	$	(11	)	$	(8	)	$	(19	)
Savings		14,620			118	3.23			12,064			87	2.90			20			11			31
Money market		6,244			69	4.44			6,429			64	4.01			(2	)		7			5
Other time deposits		10,780			124	4.63			10,449			105	4.00			3			16			19
Certificates - $100,000 and over		6,511			83	5.12			5,316			61	4.64			15			7			22
Foreign office deposits		2,369			28	4.67			4,382			52	4.77			(23	)		(1	)		(24	)
Federal funds purchased		3,540			47	5.31			3,886			48	4.97			(4	)		3			(1	)
Other short-term borrowings		2,372			25	4.31			4,854			52	4.31			(27	)		—			(27	)
Long-term debt		12,238			173	5.65			14,465			196	5.45			(31	)		8			(23	)

Total interest-bearing liabilities		73,735			750	4.08			78,870			767	3.90			(60	)		43			(17	)
Demand deposits		13,370							13,764
Other liabilities		4,063							3,500

Total liabilities		91,168							96,134
Shareholders’ equity		9,599							9,607

Total liabilities and shareholders’ equity	$	100,767						$	105,741

Net interest income				$	745						$	716			$	—		$	29		$	29
Net interest margin						3.37	%						3.01	%
Net interest rate spread						2.68							2.33
Interest-bearing liabilities to interest-earning assets						83.07							82.56

(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 net taxable equivalent adjustment amounts included in the above table are $6 million for the three months ended June 30, 2007 and 2006, respectively.

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

TABLE 3: Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE)


For the six months ended	June 30, 2007							June 30, 2006							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 loans	$	21,249		$	788	7.48	%	$	19,946		$	691	6.98	%	$	47		$	50		$	97
Commercial mortgage		10,799			391	7.31			9,712			336	6.96			38			17			55
Commercial construction		5,803			222	7.72			6,024			222	7.43			(8	)		8			—
Commercial leases		3,669			79	4.33			3,708			93	5.08			(1	)		(13	)		(14	)

Subtotal – commercial		41,520			1,480	7.19			39,390			1,342	6.86			76			62			138
Residential mortgage loans		10,184			310	6.14			9,275			270	5.87			27			13			40
Home equity		11,979			456	7.67			11,939			426	7.21			2			28			30
Automobile loans		10,392			321	6.22			9,460			261	5.55			27			33			60
Credit card		1,135			64	11.31			782			44	11.46			20			—			20
Other consumer loans/leases		1,248			32	5.22			1,521			38	4.98			(7	)		1			(6	)

Subtotal – consumer		34,938			1,183	6.83			32,977			1,039	6.35			69			75			144

Total loans and leases		76,458			2,663	7.02			72,367			2,381	6.63			145			137			282
Securities:
Taxable		10,991			273	5.02			21,878			481	4.44			(264	)		56			(208	)
Exempt from income taxes (b)		521			19	7.39			630			23	7.47			(4	)		—			(4	)
Other short-term investments		180			6	6.47			169			4	5.31			1			1			2

Total interest-earning assets		88,150			2,961	6.77			95,044			2,889	6.13			(122	)		194			72
Cash and due from banks		2,276							2,616
Other assets		10,333							8,327
Allowance for loan and lease losses		(775	)						(746	)

Total assets	$	99,984						$	105,241

Liabilities
Interest-bearing liabilities:
Interest checking	$	15,284		$	171	2.26	%	$	17,312		$	201	2.34	%	$	(23	)	$	(7	)	$	(30	)
Savings		14,157			228	3.25			11,827			163	2.79			35			30			65
Money market		6,310			139	4.45			6,258			119	3.83			1			19			20
Other time deposits		10,908			250	4.61			10,101			194	3.87			17			39			56
Certificates - $100,000 and over		6,596			168	5.15			4,995			109	4.41			39			20			59
Foreign office deposits		2,040			47	4.61			4,217			96	4.59			(50	)		1			(49	)
Federal funds purchased		3,026			80	5.31			4,217			99	4.72			(30	)		11			(19	)
Other short-term borrowings		2,386			51	4.34			4,786			97	4.07			(52	)		6			(46	)
Long-term debt		12,239			340	5.60			14,798			377	5.14			(68	)		31			(37	)

Total interest-bearing liabilities		72,946			1,474	4.07			78,511			1,455	3.74			(131	)		150			19
Demand deposits		13,278							13,719
Other liabilities		3,977							3,407

Total liabilities		90,201							95,637
Shareholders’ equity		9,783							9,604

Total liabilities and shareholders’ equity	$	99,984						$	105,241

Net interest income				$	1,487						$	1,434			$	9		$	44		$	53
Net interest margin						3.40	%						3.04	%
Net interest rate spread						2.70							2.39
Interest-bearing liabilities to interest-earning assets						82.75							82.60

(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 net taxable equivalent adjustment amounts included in the above table are $12 million and $13 million for the six months ended June 30, 2007 and 2006, respectively.

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

Interest income (FTE) from investment securities and short-term investments decreased $104 million to $149 million in the second quarter of 2007 compared to the same period in 2006. The average yield on taxable securities was 4.98%, an increase of 55 bp from the second quarter last year. The decrease in interest income and increase in yield was a result of the fourth quarter of 2006 sale of $11.3 billion of securities with a weighted average yield of 4.30%.

The interest on core deposits increased $36 million, or 10%, in the second quarter of 2007 over the comparable period in 2006 due to increases in short-term rates, shifts in deposit mix and increasing average balances. Average interest-bearing core deposits increased $738 million, or two percent, compared to the second quarter of 2006. The Bancorp continues to focus on growing its core deposit balances in order to improve the funding mix and improve net interest margin trends.

The interest on wholesale funding decreased by $53 million, or 13%, in the second quarter over the comparable period in 2006 due to a $5.9 billion decrease in average balances partially offset by increasing interest rates. Average short-term wholesale funding decreased $3.6 billion, or 20%, while average long-term debt decreased $2.2 billion, or 15%, in the second quarter of 2007 over the comparable period in 2006.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan portfolio that is based on the factors discussed in the Critical Accounting Policies section. The provision is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by the Bancorp. Actual credit losses on loans and leases are charged against the allowance for loan and lease losses. 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 current period recoveries. Current period recoveries relate to loans and leases charged-off in previous periods.

The provision for loan and lease losses increased to $121 million in the second quarter of 2007 compared to $71 million in the same period last year. The $50 million increase is primarily related to loan growth during the past year, increases in nonperforming assets and modest deterioration in economic conditions. The allowance for loan and lease losses as a percentage of loans and leases increased to 1.06% at June 30, 2007 from 1.05% at March 31, 2007 and 1.04% at June 30, 2006. The increase in allowance percentage from second quarter of 2006 is primarily due to an increase in nonperforming assets from $358 million at June 30, 2006 to $528 million at June 30, 2007.

Refer to the Credit Risk Management section for further information on the provision for loan and lease losses, net charge-offs and other factors considered by the Bancorp in assessing the credit quality of the loan portfolio and the allowance for loan and lease losses.

Noninterest Income

For the three and six months ended June 30, 2007, noninterest income increased by eight percent and seven percent, respectively. The components of noninterest income for these periods are as follows:

TABLE 4: Noninterest Income


	For the three months ended June 30,			Percent Change		For the six months ended June 30,			Percent Change
($ in millions)	2007		2006	Percent Change		2007		2006	Percent Change
Electronic payment processing revenue	$	243	211	15		$	468	407	15
Service charges on deposits		142	135	6			268	261	3
Investment advisory revenue		97	96	1			193	187	3
Corporate banking revenue		88	82	8			171	157	9
Mortgage banking net revenue		41	41	—			81	88	(8	)
Other noninterest income		96	76	27			174	157	11
Securities gains, net		—	14	(100	)		—	15	(100	)

Total noninterest income	$	707	655	8		$	1,355	1,272	7

Electronic payment processing revenue increased $32 million, or 15%, in the second quarter of 2007, compared to the same period last year as FTPS realized growth in each of its three main product lines: merchant processing, electronic funds transfer (EFT) and card issuer interchange. Merchant processing revenue increased 19%, to $113 million, compared to the same period in 2006 due to the addition of new national merchant customers and resulting increases in merchant sales volumes. Large national merchant contracts signed with the U.S. Department of Treasury and Walgreen Co., which will convert during the remainder of 2007, will continue to provide revenue growth. EFT revenue increased 11%, to $76 million, as a result of continued success in attracting financial institution customers and increased debit card volumes associated with these customers. Card issuer interchange increased 13%, to $53 million, compared to the same period in 2006 due to continued growth in debit card usage and credit card volumes. Through the second quarter of 2007, the Bancorp processed over 12.6 billion transactions and handled electronic processing for over 2,300 financial institutions and approximately 146,000 merchant locations worldwide.

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

Service charges on deposits increased six percent in the second quarter of 2007 compared to the same period last year. The increase was driven by consumer deposit service charges, which increased 11% in the second quarter of 2007 compared to the same period last year. The higher revenue was primarily driven by retail demand deposit account production, where the total number of accounts increased six percent compared to the prior year quarter. Growth in the number of customer deposit account relationships and deposit generation continues to be a primary focus of the Bancorp.

Commercial deposit service charges decreased one percent in the second quarter of 2007 compared to the same period last year as a result of a nine percent increase in earnings credits. The increase in earnings credits was a function of higher average short-term rates in the second quarter of 2007 compared to the same period in 2006. Exclusive of the impact of earnings credits, commercial deposit service charges increased one percent compared to the second quarter of 2006. Commercial customers receive earnings credits to offset the fees charged for banking services on their deposit accounts such as account maintenance, lockbox, ACH transactions, wire transfers and other ancillary corporate treasury management services. Earnings credits are based on the customer’s average balance in qualifying deposits multiplied by the crediting rate. Qualifying deposits include demand deposits and interest bearing checking accounts. The Bancorp has a standard crediting rate that is adjusted as necessary based on competitive market conditions and changes in short-term interest rates. Earnings credits cannot be given in excess of the fees charged for banking services provided, and the excess earnings credits may not be carried forward to future periods. Earnings credits are netted against gross service charges to arrive at commercial deposit revenue.

Investment advisory revenues increased one percent from the second quarter of 2006. The Bancorp realized approximately $3 million in trust tax fees from tax filings earned during the first quarter of 2007, which had been earned and filed during the second quarter of 2006. Exclusive of the trust tax fees, investment advisory income increased four percent due to success in cross-sell initiatives within the private client group, strong equity markets and improved broker productivity. The Bancorp continues to focus its sales efforts on improving execution in retail brokerage and retail mutual funds and on growing the institutional money management business by improving penetration and cross-selling in its large middle-market commercial customer base. The Bancorp is one of the largest money managers in the Midwest and, as of June 30, 2007, had approximately $232 billion in assets under care and managed $34 billion in assets for individuals, corporations and not-for-profit organizations.

Corporate banking revenue increased to $88 million in the second quarter of 2007, an increase of eight percent over the comparable period in 2006. The growth in corporate banking revenue was largely attributable to increased institutional sales of $2 million, or 29%, and customer derivatives activity of $3 million, or 26%. The Bancorp is committed to providing a comprehensive range of financial services to large and middle-market businesses and continues to see opportunities to expand its product offering.

Mortgage banking net revenue remained flat at $41 million compared to the same period last year. The components of mortgage banking net revenue for the three and six months ended June 30, 2007 and 2006 are shown in Table 5. Originations in the second quarter of 2007 were $3.3 billion compared to $2.6 billion in the second quarter of 2006. However, origination fees and gains on loan sales decreased $2 million compared to the same period last year as a result of lower margins on sales of mortgages.

TABLE 5: Components of Mortgage Banking Net Revenue


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2007			2006		2007		2006
Origination fees and gains (losses) on loan sales	$	25		27		51		48
Servicing revenue:
Servicing fees		36		30		69		59
Servicing rights amortization		(23	)	(17	)	(43	)	(31	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		3		1		4		12

Net servicing revenue		16		14		30		40

Mortgage banking net revenue	$	41		41		81		88

Mortgage net servicing revenue increased $2 million compared to the same period last year. Net servicing revenue is comprised of gross servicing fees and related amortization as well as valuation adjustments on mortgage servicing rights and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments. The Bancorp’s total residential mortgage loans serviced at June 30, 2007 and 2006 were $40.9 billion and $35.8 billion, respectively, with $31.5 billion and $27.1 billion, respectively, of residential mortgage loans serviced for others.

The increase in interest rates during both the second quarters of 2007 and 2006 and the resulting impact of changing prepayment speeds led to the recovery in temporary impairment of $12 million and $6 million for the three months ended June 30, 2007 and 2006, respectively. Servicing rights are deemed impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. Further detail on the valuation of mortgage servicing rights can be found in Note 4 of the Notes to the Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with

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

changes in impairment on the MSR portfolio. The Bancorp recognized a net loss of $9 million and $5 million for the three months ended June 30, 2007 and 2006, respectively, related to changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to hedge the MSR portfolio. In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities (primarily principal only strips) as a component of its non-qualifying hedging strategy. The Bancorp did not recognize any gain or loss on the sale of securities related to mortgage servicing rights during the second quarter of 2007 or 2006.

Other noninterest income increased 27% in the second quarter of 2007 compared to the same period last year. This increase was primarily driven by a $16 million gain recognized from the sale of $89 million in certain non-strategic credit card accounts. The Bancorp is focused on building its credit card business by growing multi-product relationships through its retail distribution network. The accounts sold were single product relationships, which were a result of an inability to cross-sell effectively or natural customer attrition.

The major components of other noninterest income are as follows:

TABLE 6: Components of Other Noninterest Income


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007	2006
Bank owned life insurance income	$	21	22	42	43
Cardholder fees		13	11	26	23
Consumer loan and lease fees		11	13	21	24
Insurance income		9	7	16	14
Operating lease income		7	7	14	15
Gain on loan sales		16	4	17	10
Other		19	12	38	28

Total other noninterest income	$	96	76	174	157

Noninterest Expense

During the second quarter of 2007, the Bancorp continued its investment in the expansion of the retail distribution network and in its information technology infrastructure. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 55.3% for the second quarter of 2007 and 2006. The Bancorp continues to focus on efficiency initiatives, as part of its core emphasis on operating leverage, and on expense control, although cost savings initiatives will continue to be somewhat mitigated by investments in certain high opportunity markets as evidenced by the 11 net new banking centers added during the second quarter of 2007. The Bancorp views investments in information technology and de novo expansion as its platform for future growth and increasing expense efficiency.

The major components of noninterest expense are as follows:

TABLE 7: Noninterest Expense


	For the three months ended June 30,			Percent Change		For the six months ended June 30,			Percent Change
($ in millions)	2007		2006	Percent Change		2007		2006	Percent Change
Salaries, wages and incentives	$	309	303	2		$	601	586	3
Employee benefits		68	69	(2	)		155	156	(1	)
Payment processing expense		97	80	21			189	151	25
Net occupancy expense		68	59	14			133	118	13
Technology and communications		41	34	22			81	66	22
Equipment expense		31	28	10			60	54	12
Other noninterest expense		189	186	2			376	359	5

Total noninterest expense	$	803	759	6		$	1,595	1,490	7

Total noninterest expense increased six percent and seven percent for the three and six months ended June 30, 2007, respectively, due to investment in technology, higher de novo related expenses and increased volume-related processing expense. The two percent increase in salaries, wages and incentives compared to the second quarter of 2007 reflected severance expense of approximately $5 million taken during the second quarter of 2007 associated with management’s planned expense reduction initiatives. Full time equivalent employees totaled 21,033 as of June 30, 2007 compared to 21,230 as of June 30, 2006.

Payment processing expense includes third-party processing expenses, network membership charges, card management fees and other bankcard processing expenses. Payment processing expense increased 21% compared to the second quarter of 2006, as a result of these primarily volume-related processing expenses. Processing volumes increased 17% and 28% for the merchant processing and EFT businesses, respectively, for the three months ended June 30, 2007 compared to the same quarter last year. Additionally, the growth in this line reflects the conversion of national merchant contracts during the quarter.

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

Net occupancy expense increased 14% in the second quarter of 2007 over the same period last year due to the addition of 55 net new banking centers since June 30, 2006. The Bancorp remains focused on expanding its retail franchise through de novo growth.

The major components of other noninterest expense are as follows:

TABLE 8: Components of Other Noninterest Expense


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007	2006
Loan processing	$	32	20	55	41
Marketing		20	21	38	42
Postal and courier		13	12	26	25
Travel		13	14	25	25
Intangible amortization		10	11	21	22
Supplies		7	7	14	14
Operating lease		5	4	10	10
Franchise and other taxes		—	10	9	18
Other		89	87	179	162

Total other noninterest expense	$	189	186	376	359

Total other noninterest expense increased $3 million, or two percent from the second quarter of 2006. Higher loan processing costs associated with collection activities were offset by a decline in franchise and other taxes that resulted from a favorable settlement related to the completion of certain tax audits.

Applicable Income Taxes

The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate for each of the periods are as follows:

TABLE 9: Applicable Income Taxes


	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2007			2006	2007	2006
Income before income taxes and cumulative effect	$	522		535	1,030	1,054
Applicable income taxes		146		153	295	312
Effective tax rate		28.1	%	28.5	28.7	29.6

Applicable income tax expense for both periods includes the benefit from tax-exempt income, tax-advantaged investments and general business tax credits, partially offset by the effect of nondeductible expenses. The Bancorp expects the full year tax for 2007 to be 28.5 to 29.0%.

Cumulative Effect of Change in Accounting Principle

In the first quarter of 2006, the Bancorp recognized a benefit of approximately $4 million, net of $2 million of tax, related to the adoption of SFAS No. 123 (Revised 2004) “Share-Based Payment.” The benefit recognized relates to the Bancorp’s estimate of forfeiture experience to be realized for all unvested stock-based awards outstanding.

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

BUSINESS SEGMENT REVIEW

The Bancorp reports on five business segments: Commercial Banking, Branch Banking, Consumer Lending, Investment Advisors and Processing Solutions. Further detailed financial information on each business segment is included in Note 15 of the Notes to the 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 accounting practices are improved and businesses change. Revisions to the Bancorp’s methodologies are applied on a retroactive basis. During the fourth quarter of 2006, the Bancorp changed the application of the provision for loan and lease losses to the segments to include only actual net charge-offs.

The Bancorp manages interest rate risk centrally at the corporate level by employing a funds transfer pricing (“FTP”) methodology. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the Treasury swap curve. Matching duration, or the expected term until an instrument can be repriced, allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorp’s FTP system credits this benefit to deposit providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology, including the benefit from the widening spread between deposit costs and wholesale funding, is captured in General Corporate and Other. During the fourth quarter of 2006, the Bancorp made certain changes to the average duration of indeterminate-lived deposits and corresponding changes to the FTP crediting rates assigned to those deposits. This change more closely aligns the crediting rates to the expected economic benefit while continuing to insulate the segments from interest rate volatility.

The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they were to exist as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit. Net income by business segment is summarized as follows:

TABLE 10: Business Segment Results


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2007			2006		2007		2006
Commercial Banking	$	162		150		320		300
Branch Banking		167		147		327		287
Consumer Lending		35		41		69		88
Investment Advisors		23		21		47		41
Processing Solutions		40		51		72		82
General Corporate and Other		(51	)	(28	)	(100	)	(52	)

Net income	$	376		382		735		746

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

Commercial Banking

Commercial Banking provides a comprehensive range of financial services and products to large and middle-market businesses, governments and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include, among others, 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 table below contains selected financial data for the Commercial Banking segment.

TABLE 11: Commercial Banking


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income (FTE)	$	292	291	584	579
Provision for loan and lease losses		25	21	42	41
Noninterest income:
Corporate banking revenue		80	75	156	144
Service charges on deposits		35	36	71	73
Other noninterest income		19	9	39	19
Noninterest expense:
Salaries, incentives and benefits		62	61	131	122
Other noninterest expenses		127	121	251	235

Income before taxes		212	208	426	417
Applicable income taxes (a)		50	58	106	117

Net income	$	162	150	320	300

Average Balance Sheet Data
Commercial loans	$	34,826	32,458	34,397	31,959
Demand deposits		5,514	5,697	5,529	5,775
Interest checking		3,921	3,734	3,971	3,814
Savings and money market		4,294	5,102	4,437	5,188
Certificates over $100,000 and other time		1,974	1,556	1,952	1,493
Foreign office deposits		1,377	466	1,229	383

(a)

Includes taxable-equivalent adjustments of $3 million for the three months ended June 30, 2007 and 2006 and $7 million for the six months ended June 30, 2007 and 2006.

Net income increased $12 million, or eight percent, compared to the second quarter of 2006 as loan and corporate banking revenue growth was offset by the decline in core deposits. Net interest income was flat compared to the second quarter of 2006 as an increase in average loans and leases was offset by loan spreads tightening and lower average deposit balances. Average loans and leases increased seven percent to $34.9 billion over the prior year second quarter, with double-digit growth occurring in commercial and industrial loans. Average core deposits decreased five percent compared to the second quarter of 2006 due to an increase in pay downs on commercial lines of credit and commercial customers moving balances to Eurodollar sweep accounts, which are included in foreign office deposits. Eurodollar sweep accounts pay rates above money market accounts, but do not require collateral or FDIC insurance costs. Core deposits combined with Eurodollar sweep balances increased one percent over the second quarter of 2006. Net charge-offs as a percent of average loan and leases increased to 29 bp from 26 bp in the second quarter of 2006. Loans over 90 days past due increased 47% compared to the first quarter of 2007. Delinquency growth was concentrated in manufacturing, construction and real estate lending in Michigan and South Florida. The Commercial Banking segment continues to focus on credit although it expects to see delinquencies trend upward during 2007.

Noninterest income increased $14 million, or 12%, compared to the same quarter last year due to a $5 million increase in corporate banking revenue and a $10 million increase in other noninterest income. Corporate banking revenue increased as a result of continued sales success in interest rate derivatives, an increase of $2 million or 22%, and institutional sales, an increase of $2 million or 24%. Recently, the Commercial Banking segment introduced new treasury management products and remains focused on further penetration of middle-market customers and the healthcare industry throughout its affiliates. Other noninterest income improved on increased volume of operating leases, gains on sales of equipment from expiring leases and an increase in other fees.

Noninterest expense increased $7 million, or four percent, compared to the second quarter of 2006 volume-related increases in operating lease expenses and higher costs associated with collection activities.

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 and lease products to individuals and small businesses through 1,167 banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity lines of credit, credit cards and loans for automobile and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services. The table below contains selected financial data for the Branch Banking segment.

TABLE 12: Branch Banking


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income	$	370	326	729	647
Provision for loan and lease losses		39	26	61	52
Noninterest income:
Service charges on deposits		103	95	191	182
Card issuer interchange		48	42	91	79
Merchant and EFT processing		9	8	16	14
Investment advisory income		24	23	47	46
Other noninterest income		34	29	64	58
Noninterest expense:
Salaries, incentives and benefits		119	115	238	230
Net occupancy and equipment expenses		44	38	85	75
Other noninterest expenses		128	117	249	225

Income before taxes		258	227	505	444
Applicable income taxes		91	80	178	157

Net income	$	167	147	327	287

Average Balance Sheet Data
Consumer loans	$	11,619	11,345	11,659	11,328
Commercial loans		5,140	5,304	5,162	5,338
Demand deposits		5,826	5,912	5,774	5,891
Interest checking		9,045	10,943	9,214	11,210
Savings and money market		14,518	11,739	14,016	11,410
Certificates over $100,000 and other time		13,703	12,752	13,908	12,204

Net income increased $20 million, or 14%, compared to the second quarter of 2006 as growth in deposits and an increase in FTP rates earned on deposits offset higher de novo related noninterest expenses. Average loans and leases increased modestly as growth from the introduction of a new mortgage product and increased credit card production was offset by a decrease in commercial loans. Average core deposits increased three percent and total deposits increased four percent over the second quarter of 2006 with double-digit increases in savings and money market and certificates of deposit over $100,000 mitigated by a $1.9 billion, or 17%, decrease in interest checking deposits. Branch Banking continued to realize a shift to higher cost deposits, though the pace of the shift has declined compared to the prior year. As a result of the growth in core deposits of three percent and the related net FTP impact, net interest income increased $44 million compared to the same period last year. Net charge-offs as a percent of average loan and leases increased to 91 bp from 63 bp in the second quarter of 2006.

Noninterest income increased $21 million, or 11%, compared to the second quarter of 2006. Service charges on deposits increased nine percent, or $8 million, compared to the second quarter of 2006. Electronic payment processing revenue increased $7 million, or 14%. Card issuer interchange fees, which comprise the majority of the Branch Banking’s electronic payment processing revenues, increased from $42 million in the second quarter of 2006 to $48 million in the second quarter of 2007 due to increased card usage and an increase in the number of accounts.

Noninterest expense increased eight percent compared to the second quarter of 2006 as net occupancy and equipment costs increased 13% as a result of the continued opening of new banking centers related to the Bancorp’s de novo growth strategy. Since the second quarter of 2006, 55 new banking centers were opened that did not involve relocation or consolidation of existing facilities. The Bancorp continues to position itself for sustained long-term growth through new banking center additions in key markets within its footprint.

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

Consumer Lending

Consumer Lending includes the Bancorp’s mortgage and home equity lending activities and other indirect lending activities. Mortgage and home equity lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans or pools of loans or lines of credit and all associated hedging activities. Other indirect lending activities include loans to consumers through dealers as well as federal and private student education loans. The table below contains selected financial data for the Consumer Lending segment.

TABLE 13: Consumer Lending


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income	$	88	92	179	184
Provision for loan and lease losses		27	17	53	40
Noninterest income:
Mortgage banking net revenue		39	39	75	85
Other noninterest income		18	21	34	47
Noninterest expense:
Salaries, incentives and benefits		21	27	44	53
Other noninterest expenses		43	45	84	87

Income before taxes		54	63	107	136
Applicable income taxes		19	22	38	48

Net income	$	35	41	69	88

Average Balance Sheet Data
Residential mortgage loans	$	9,996	9,476	9,926	9,259
Home equity		1,372	1,306	1,370	1,267
Automobile loans		9,582	8,468	9,421	8,439
Consumer leases		944	1,386	992	1,462

Net income decreased $6 million, or 14%, compared to the second quarter of 2006. Net interest income decreased four percent from the prior year despite average loans and leases increasing six percent, as higher yields on automobile loans were offset by a decline in the spread between loan yields and the related FTP charge on residential mortgage products due to the increasingly competitive environment in this segment. Net charge-offs as a percent of average loan and leases increased from 35 bp in the second quarter of 2006 to 54 bp in the second quarter of 2007 due to increases in both residential mortgage and indirect automobile lending.

Consumer Lending had mortgage originations of $3.1 billion and $2.6 billion for the three months ended June 30, 2007 and 2006. Origination fees and gains on loan sales were $23 million, a decrease of $2 million compared to the second quarter of 2006 despite the increase in mortgage originations due to the lower margins on sale of mortgages. The narrowing margins are a result of market conditions and higher mix of originations from the wholesale channel compared to the second quarter of 2006. Mortgage banking net service revenue increased $2 million due primarily to the increase in the net MSR valuation adjustment as a result of increasing long-term interest rates in the second quarter of 2007. Noninterest expense decreased $8 million, or 11%, primarily from lower salaries and related employee benefits expense due to a reduction in personnel compared to the prior year.

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

Investment Advisors

Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. The Bancorp’s primary services include trust, asset management, retirement plans, custody and private client banking. Fifth Third Securities, Inc., an indirect wholly-owned subsidiary of the Bancorp, offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. Fifth Third Asset Management, Inc., an indirect wholly-owned subsidiary of the Bancorp, provides asset management services and also advises the Bancorp’s proprietary family of mutual funds, Fifth Third Funds.* The table below contains selected financial data for the Investment Advisors segment.

TABLE 14: Investment Advisors


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007		2006
Income Statement Data
Net interest income	$	37	32	$	73	63
Provision for loan and lease losses		2	1		5	2
Noninterest income:
Investment advisory income		99	96		195	188
Other noninterest income		5	5		11	9
Noninterest expense:
Salaries, incentives and benefits		41	44		84	87
Other noninterest expenses		62	56		118	108

Income before taxes		36	32		72	63
Applicable income taxes		13	11		25	22

Net income	$	23	21	$	47	41

Average Balance Sheet Data
Loans and leases	$	3,163	3,072	$	3,137	3,058
Core deposits		4,924	4,658		4,868	4,398

Net income increased $2 million, or 12%, compared to the second quarter of 2006 as a result of increased deposits and modest fee growth. Net interest income increased to $37 million, an increase of $5 million, or 18%, as a result of average core deposit growth of six percent and the related increase in the FTP credit for these deposits. Savings and money market deposits were up 27% and consumer time deposits increased 36% compared to the prior year offset by a 11% decline in interest checking.

Investment advisory income increased two percent from the second quarter of 2006. The comparison to the prior year is impacted by the recognition of approximately $3 million in seasonal trust tax fees, which were completed in the first quarter of 2007. In 2006, these fees were earned in the second quarter. Exclusive of this impact, investment advisory income increased six percent primarily due to strong brokerage results and increased sales of insurance and other risk mitigation products. As of June 30, 2007, the Bancorp has $232 billion in assets under care and $34 billion in managed assets.

Noninterest expense grew three percent compared to the prior year as the Investment Advisors segment continues to focus on expense control. Other noninterest expense growth of 11% was partially offset by lower compensation and incentives in comparison to the same quarter last year.

*	FIFTH THIRD FUNDS^® PERFORMANCE DISCLOSURE

Fifth Third Funds investments are: NOT INSURED BY THE FDIC or any other government agency, are not deposits or obligations of, or guaranteed by, any bank, the distributor or of the Funds any of their respective affiliates, and involve investment risks, including the possible loss of the principal amount invested. An investor should consider the fund’s investment objectives, risks and charges and expenses carefully before investing or sending money. The Funds’ prospectus contains this and other important information about the Funds. To obtain a prospectus or any other information about Fifth Third Funds, please call 1-800-282-5706 or visit www.53.com. Please read the prospectus carefully before investing. Fifth Third Funds are distributed by Fifth Third Funds Distributor, Inc., 3435 Stelzer Road, Columbus, Ohio 43219.

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

Processing Solutions

Fifth Third Processing Solutions provides electronic funds transfer, debit, credit and merchant transaction processing, operates the Jeanie^® ATM network and provides other data processing services to affiliated and unaffiliated customers. The table below contains selected financial data for the Processing Solutions segment.

TABLE 15: Processing Solutions


	For the three months ended June 30,			For the six months ended June 30,
($ in millions)	2007		2006	2007		2006
Income Statement Data
Net interest income	$	8	8	$	15	15
Provision for loan and lease losses		9	2		11	4
Noninterest income:
Merchant processing		114	97		217	186
EFT processing		83	73		165	144
Other noninterest income		15	28		17	30
Noninterest expense:
Salaries, incentives and benefits		19	18		38	35
Payment processing expense		95	75		186	141
Net occupancy and equipment expenses		2	2		4	3
Other noninterest expenses		33	31		64	65

Income before taxes		62	78		111	127
Applicable income taxes		22	27		39	45

Net income	$	40	51	$	72	82

Net income decreased $11 million, or 21%, compared to the second quarter of 2006 primarily due to the $24 gain from the sale of the Bancorp’s MasterCard, Inc. shares in the second quarter of 2006, which was partially offset by the $12 million gain recognized by the Processing Solutions segment in the second quarter of 2007 on the sale of certain non-strategic credit card accounts. Excluding these transactions, pretax income declined by $4 million, or eight percent, compared to the second quarter of 2006; comparison being provided to supplement an understanding of fundamental revenue trends. Merchant and EFT revenues increased by $17 million, or 17%, and $10 million, or 14%, respectively, primarily due to new customer additions and growth in transaction volume. Strong merchant revenue growth is expected to continue as national contracts signed during the past year convert throughout 2007. The increase in charge-offs was solely due to one large commercial credit that was not typical of the types of loans the segment originates.

Payment processing expense increased 28% from increased transaction volume, expenses related to merchant equipment and additional costs related to bankcard conversion to the Bancorp’s new brand. Merchant transactions processed increased 17% and EFT transactions increased 28% over the second quarter of 2006. Expenses are expected to moderate in future quarters to be more consistent with revenue growth while reflecting spread pressure during the renewal of current customer contracts. The Bancorp continues to see significant opportunities to attract new financial institution customers and retailers within this business segment.

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment portfolio, certain non-core deposit funding, unassigned equity and certain support activities and other items not attributed to the business segments.

Net income decreased by $23 million compared to the same quarter last year. The results of General Corporate and Other were primarily impacted by the repricing of earning assets compared to the repricing of earning liabilities in an inverted yield curve environment. Compared to the second quarter of 2006, the average yield on interest-earning assets and the related FTP charge decreased 21 bp while the average yield on interest-bearing liabilities and the related FTP credit has increased 62 bp. Net interest income decreased $17 million compared to the second quarter of 2006 as a result of the inverted yield curve, mitigated by the reduction in the size of the available-for-sale securities portfolio carried at a negative spread. The General Corporate and Other segment also includes the growth in allowance for loan and leases losses; provision for loan and lease losses was $19 million in the second quarter of 2007 compared to $4 million in the same quarter last year. This increase was offset by losses on the sale of securities of $10 million during the second quarter of 2006.

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

BALANCE SHEET ANALYSIS

Loans

The table below summarizes the end of period total loans and leases, which includes loans held for sale. The Bancorp classifies its loans and leases based upon the primary purpose of the loan.

TABLE 16: Components of Total Loans and Leases (includes held for sale)


	June 30, 2007			December 31, 2006			June 30, 2006
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	22,162	29	$	20,831	28	$	20,717	28
Commercial mortgage loans		11,112	14		10,405	14		9,792	13
Commercial construction loans		5,469	7		6,168	8		5,950	8
Commercial leases		3,698	5		3,841	5		3,740	5

Total commercial loans and leases		42,441	55		41,245	55		40,199	54

Consumer:
Residential mortgage loans		10,038	13		9,905	13		9,528	13
Home equity		11,780	15		12,154	16		12,087	17
Automobile loans		10,714	14		10,028	13		9,512	13
Credit card		1,263	2		1,004	1		846	1
Other consumer loans and leases		1,181	1		1,167	2		1,336	2

Total consumer loans and leases		34,976	45		34,258	45		33,309	46

Total loans and leases	$	77,417	100	$	75,503	100	$	73,508	100

Total loans and leases increased five percent over the second quarter of 2006 and three percent over the first quarter of 2007. During the fourth quarter of 2006, the Bancorp reviewed its loan classifications, which resulted in a reclassification of approximately $450 million of commercial loans to commercial mortgage loans. Prior year balances were not restated.

Total commercial loans and leases increased $2.2 billion, or six percent, compared to June 30, 2006 and three percent compared to December 31, 2006. The sequential increase was primarily due to strong growth in commercial loans, which increased six percent over the fourth quarter of 2006. Commercial mortgage loans increased seven percent over the fourth quarter of 2006 with growth driven by the conversion of construction loans to permanent financing. The overall mix of commercial loans was consistent with prior periods.

Total consumer loans and leases increased $1.7 billion, or five percent, compared to June 30, 2006, as a result of the introduction of new residential mortgage products, increased promotion of credit cards and strong automobile loan growth. Credit cards increased to $1.3 billion, an increase of 49%, over the second quarter of 2006, as the Bancorp placed an emphasis on cross-selling credit cards to its existing retail customer base. Automobile loans increased by approximately $1.2 billion, or 13%, due to more indirect financing relationships. Credit card and automobile loan growth was offset by anticipated run-off in the consumer lease portfolio totaling $417 million since the second quarter of 2006. Excluding this run-off, consumer loans and leases grew seven percent compared to the same quarter last year.

TABLE 17: Components of Average Total Loans and Leases (includes held for sale)


	June 30, 2007			December 31, 2006			June 30, 2006
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	21,587	28	$	21,228	28	$	20,338	28
Commercial mortgage loans		11,030	14		9,929	13		9,980	14
Commercial construction loans		5,595	7		6,099	8		5,840	8
Commercial leases		3,678	5		3,762	6		3,729	5

Total commercial loans and leases		41,890	54		41,018	55		39,887	55

Consumer:
Residential mortgage loans		10,201	13		10,038	13		9,491	13
Home equity		11,886	15		12,225	16		11,999	16
Automobile loans		10,552	14		9,834	13		9,480	13
Credit card		1,248	2		915	1		797	1
Other consumer loans and leases		1,271	2		1,232	2		1,439	2

Total consumer loans and leases		35,158	46		34,244	45		33,206	45

Total average loans and leases	$	77,048	100	$	75,262	100	$	73,093	100

Total portfolio loans and leases (excludes held for sale)	$	75,205		$	74,032		$	72,209

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

Average commercial loans and leases increased $2.0 billion, or five percent, compared to the second quarter of 2006. The increase in average commercial loans and leases was primarily driven by strong growth in commercial loans and commercial mortgage loans, which combined, increased eight percent over the second quarter of 2006. The Bancorp experienced strong growth in most of its markets, including over 20% growth in the Bancorp’s key growth markets of Nashville, Orlando and Tampa.

Average consumer loans and leases increased $2.0 billion, or six percent, compared to the second quarter of 2006 as a result of the growth in credit card balances and automobile loans. The Bancorp experienced growth in the majority of its markets highlighted by 31% growth in Nashville, 11% in Florida and nine percent in Chicago.

Investment Securities

Total investment securities were $11.5 billion, $11.6 billion and $20.9 billion at June 30, 2007, December 31, 2006 and June 30, 2006, respectively. 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. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale portfolio and maintains the intent and ability to hold these securities to the earlier of the recovery of the losses or maturity.

The following table provides a breakout of the components of investment securities.

TABLE 18: Components of Investment Securities (amortized cost basis)


($ in millions)	June 30, 2007		December 31, 2006	June 30, 2006
Available-for-sale and other:
U.S. Treasury and Government agencies	$	103	1,396	505
U.S. Government sponsored agencies		260	100	1,816
Obligations of states and political subdivisions		552	603	650
Agency mortgage-backed securities		9,232	7,999	15,246
Other bonds, notes and debentures		150	172	2,140
Other securities		1,073	966	1,019

Total available-for-sale and other securities	$	11,370	11,236	21,376

Held-to-maturity:
Obligations of states and political subdivisions	$	344	345	347
Other bonds, notes and debentures		2	11	11

Total held-to-maturity	$	346	356	358

During the second quarter of 2007, net unrealized losses on the available-for-sale securities portfolio increased from $162 million at March 31, 2007 to $355 million at June 30, 2007 due to increases in longer-term rates. At June 30, 2007, 98% of the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by U.S. Treasury and Government agencies, U.S. Government sponsored agencies and states and political subdivisions as well as agency mortgage-backed securities. The Bancorp believes the price movements in these securities were the result of the movement in market interest rates.

On an amortized cost basis, period end available-for-sale securities increased $134 million since December 31, 2006 and decreased $10.0 billion since June 30, 2006. The increase from the first quarter of 2007 was a result of cash flows being reinvested in the portfolio. The decrease from the second quarter of 2006 was a result of the balance sheet actions taken in the fourth quarter of 2006 to reduce the available-for-sale securities portfolio to a size that is more consistent with its liquidity, collateral and interest rate risk management requirements. At June 30, 2007, available-for-sale securities were 13% of interest-earning assets, unchanged from December 31, 2006 and down from 22% at June 30, 2006. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 5.5 years at June 30, 2007 compared to 4.3 years at December 31, 2006 and 4.8 years at June 30, 2006. The weighted-average yield of the debt securities in the available-for-sale portfolio was 5.33% at June 30, 2007 compared to 5.18% at December 31, 2006 and 4.58% at June 30, 2006.

Information presented in Table 19 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed utilizing historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity.

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

TABLE 19: Characteristics of Available-for-Sale and Other Securities


As of June 30, 2007 ($ in millions)	Amortized Cost		Fair Value		Weighted- Average Life (in years)	Weighted- Average Yield
U.S. Treasury and Government agencies:
Average life of one year or less	$	100	$	100	0.1	4.85	%
Average life 1 – 5 years		—		—	—	—
Average life 5 – 10 years		—		—	—	—
Average life greater than 10 years		3		3	13.0	6.50

Total		103		103	0.4	4.91
U.S. Government sponsored agencies:
Average life of one year or less		—		—	—	—
Average life 1 – 5 years		160		159	2.3	4.83
Average life 5 – 10 years		100		94	5.2	4.20
Average life greater than 10 years		—		—	—	—

Total		260		253	3.4	4.59
Obligations of states and political subdivisions (a):
Average life of one year or less		52		52	0.5	7.78
Average life 1 – 5 years		329		333	3.3	7.27	(b)
Average life 5 – 10 years		136		138	6.5	7.07	(b)
Average life greater than 10 years		35		35	11.2	3.92	(b)

Total		552		558	4.3	7.27
Agency mortgage-backed securities:
Average life of one year or less		4		4	0.7	6.90
Average life 1 – 5 years		2,436		2,373	3.5	4.89
Average life 5 – 10 years		6,757		6,470	6.5	5.30
Average life greater than 10 years		35		33	10.1	5.05

Total		9,232		8,880	5.7	5.19
Other bonds, notes and debentures (c):
Average life of one year or less		12		13	0.4	38.65	(d)
Average life 1 – 5 years		128		125	3.0	5.90
Average life 5 – 10 years		10		10	9.3	5.52
Average life greater than 10 years		—		—	—	—

Total		150		148	3.3	8.49
Other securities (e)		1,073		1,073

Total available-for-sale and other securities	$	11,370	$	11,015	5.5	5.33	%

(a)

Taxable-equivalent yield adjustments included in above table are 2.55%, 2.39%, 2.33%, 1.29% and 2.39% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

(b)

Weighted-average yield excludes $1 million, $17 million and $35 million of securities with an average life of 1-5 years, 5-10 years and greater than 10 years, respectively, related to qualified zone academy bonds whose yields are realized through income tax credits. The weighted-average effective yield of these instruments is 6.77%.

(c)

Other bonds, notes and debentures consist of non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.

(d)

Amount includes residual interest in an automobile securitization with a cost of $6 million and fair market value of $7 million, which is expected to mature in the third quarter of 2007.

(e)

Other securities consist of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank restricted stock holdings that are carried at cost, Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock holdings, certain mutual fund holdings and equity security holdings.

Deposits

The table below summarizes the end of period total deposits by major category:

TABLE 20: Deposits


	June 30, 2007			December 31, 2006		June 30, 2006
($ in millions)	Balance		% of Total	Balance	% of Total	Balance	% of Total
Demand	$	13,524	20	14,331	21	14,078	20
Interest checking		14,672	21	15,993	23	16,788	24
Savings		15,036	22	13,181	19	12,061	17
Money market		6,334	9	6,584	9	6,505	9

Transaction deposits		49,566	72	50,089	72	49,432	70
Other time		10,428	15	10,987	16	10,627	15

Core deposits		59,994	87	61,076	88	60,059	85
Certificates - $100,000 and over		6,204	9	6,628	10	5,691	8
Foreign office		2,995	4	1,676	2	4,773	7

Total deposits	$	69,193	100	69,380	100	70,523	100

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

Deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on transaction account deposit growth in its retail and commercial franchises by expanding its retail franchise, enhancing its product offering and providing competitive rates. During the first quarter of 2007, the Bancorp expanded its deposit product line by offering a new savings account to help customers identify and reach savings goals and an equity-linked certificate of deposit. At June 30, 2007, core deposits represented 59% of the Bancorp’s asset funding base, compared to 57% at June 30, 2006.

Overall, transaction and core deposit balances remained relatively flat compared to June 30, 2006 although balances continued to migrate from demand and interest checking accounts to savings. Compared to December 31, 2006, demand deposit and interest checking balances decreased due to the seasonality of customer tax payments in the second quarter. While the Bancorp continues to realize a mix shift as customers move from lower-yield transaction accounts to higher-yield time deposits, the pace of the shift decreased compared to the prior year. The table below summarizes the average deposits by major category for the three months ended:

TABLE 21: Average Deposits


	June 30, 2007			December 31, 2006		June 30, 2006
($ in millions)	Balance		% of Total	Balance	% of Total	Balance	% of Total
Demand	$	13,370	19	13,882	20	13,764	20
Interest checking		15,061	22	15,744	23	17,025	25
Savings		14,620	21	12,812	18	12,064	17
Money market		6,244	9	6,572	9	6,429	9

Transaction deposits		49,295	71	49,010	70	49,282	71
Other time		10,780	16	10,991	16	10,449	15

Core deposits		60,075	87	60,001	86	59,731	86
Certificates - $100,000 and over		6,511	10	6,750	10	5,316	8
Foreign office		2,369	3	2,758	4	4,382	6

Total deposits	$	68,955	100	69,509	100	69,429	100

Average core deposits increased one percent compared to the second quarter of 2006 as increases in savings were offset by declines in interest checking. Average core deposits increased for the Tennessee, Louisville and Northeastern Ohio affiliates by 17%, 9% and 8%, respectively, compared to the second quarter of 2006.

Foreign office deposits represent U.S. dollar denominated deposits of the Bancorp’s foreign branch located in the Cayman Islands. Included in foreign office deposits are Eurodollar sweep accounts for the Bancorp’s commercial customers. These accounts bear interest at rates slightly higher than money market accounts, but the Bancorp does not have to pay FDIC insurance nor hold collateral. Average balances for commercial customer Eurodollar accounts increased $900 million, to $1.4 billion compared to the second quarter of 2006. Average core deposits increased two percent compared to June 30, 2006, including the commercial customer Eurodollar sweep balances. The remaining foreign office balances are brokered deposits and the Bancorp uses these, as well as certificates of deposit $100,000 and over, as a method to fund earning asset growth.

Borrowings

Total short-term borrowings were $7.2 billion at June 30, 2007 compared to $4.2 billion at December 31, 2006 and $7.8 billion at June 30, 2006. As of June 30, 2007, December 31, 2006 and June 30, 2006, total borrowings as a percentage of interest-bearing liabilities were 26%, 23% and 28%, respectively. The decrease in borrowings from the second quarter of 2006 is a result of a reduction in other short-term borrowings and long-term debt due to the balance sheet actions in the fourth quarter of 2006. The Bancorp also reduced long-term debt by redeeming two previous trust preferred securities issuances totaling approximately $300 million in the first quarter of 2007.

The Bancorp continues to explore additional alternatives regarding the level and cost of various other sources of funding. Refer to the Liquidity Risk Management section for discussion on the Bancorp’s liquidity management. In March 2007, the Bancorp issued $750 million in junior subordinated notes. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for further discussion. On August 1, 2007, Fifth Third Capital Trust V, a wholly-owned non-consolidated subsidiary of the Bancorp, issued $500 million of Tier I-qualifying trust preferred securities to third party investors and invested the proceeds in junior subordinated notes issued by the Bancorp. See Note 18 of the Notes to the Condensed Consolidated Financial Statements for further discussion.

TABLE 22: Borrowings


($ in millions)	June 30, 2007		December 31, 2006	June 30, 2006
Federal funds purchased	$	3,824	1,421	2,493
Other short-term borrowings		3,331	2,796	5,275
Long-term debt		11,957	12,558	14,502

Total borrowings	$	19,112	16,775	22,270

Quantitative and Qualitative Disclosure about Market Risk (Item 3)

RISK MANAGEMENT – OVERVIEW

Managing risk is an essential component of successfully operating a financial services company. The Bancorp’s risk management function is responsible for the identification, measurement, monitoring, control and reporting of risk and mitigation of those risks that are inconsistent with the Bancorp’s risk profile. The Enterprise Risk Management division (“ERM”), led by the Bancorp’s Chief Risk Officer, ensures consistency in the Bancorp’s approach to managing and monitoring risk within the structure of the Bancorp’s affiliate operating model. In addition, the Internal Audit division provides an independent assessment of the Bancorp’s internal control structure and related systems and processes. The risks faced by the Bancorp include, but are not limited to, credit, market, liquidity, operational and regulatory compliance. ERM includes the following key functions:

•

Risk Policy - ensures consistency in the approach to risk management as the Bancorp’s clearinghouse for credit, market and operational risk policies, procedures and guidelines;

•

Credit Risk Review - responsible for evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, counter-party credit risk, the accuracy of risk grades assigned to commercial credit exposure, and appropriate accounting for charge-offs, non-accrual status and specific reserves;

•

Capital Markets Risk Management - responsible for establishing and monitoring proprietary trading limits, monitoring liquidity and interest rate risk and utilizing value at risk and earnings at risk models;

•

Compliance Risk Management - responsible for oversight of compliance with all banking regulations;

•

Operational Risk Management - responsible for the risk self-assessment process, the change control evaluation process, fraud prevention and detection, and root cause analysis and corrective action plans relating to identified operational losses;

•

Insurance Risk Management - responsible for all property, casualty and liability insurance policies including the claims administration process for the Bancorp;

•

Investment Advisors Risk Management - responsible for trust compliance, fiduciary risk and trading risk in the Investment Advisors line of business; and

•

Risk Strategies and Reporting - responsible for quantitative analytics and Board of Directors and senior management reporting on credit, market and operational risk metrics.

Designated risk managers have been assigned to all business lines reporting directly to ERM and directly or indirectly to senior executives within the division or affiliate. Affiliate risk management is handled by regional risk managers who are responsible for multiple affiliates and who report jointly to affiliate presidents and ERM.

Risk management oversight and governance is provided by the Risk and Compliance Committee of the Board of Directors and through multiple management committees whose membership includes a broad cross-section of line of business, affiliate and support representatives. The Risk and Compliance Committee of the Board of Directors consists of four outside directors and has the responsibility for the oversight of credit, market, operational, regulatory compliance and strategic risk management activities for the Bancorp, as well as for the Bancorp’s overall aggregate risk profile. The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. These committees include the Market Risk Committee, the Corporate Credit Committee, the Credit Policy Committee, the Operational Risk Committee and the Executive Asset Liability Risk Committee. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and approved by the Risk and Compliance Committee of the Board of Directors.

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 an individual customer default. 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. These practices include conservative exposure, counterparty limits and conservative underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and monthly management reviews of large credit exposures and credits experiencing deterioration of credit quality. Lending officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Lending activities are largely decentralized, while ERM manages the policy and authority delegation process centrally. The Credit Risk Review function, within ERM, provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off and reserve analysis process.

The Bancorp’s credit review process and overall assessment of required allowances is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis

Quantitative and Qualitative Disclosure about Market Risk (continued)

purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system that provides for thirteen probabilities of default grade categories and an additional six grade categories for estimating actual losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-grade risk rating system. The Bancorp is in the process of completing significant validation and testing of the dual risk rating system prior to implementation for reserve analysis purposes. The dual risk rating system is expected to be consistent with Basel II expectations and allows for more precision in the analysis of commercial credit risk. Scoring systems and delinquency monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer loan portfolios.

Portfolio Diversity

The Bancorp’s credit risk management strategy includes minimizing concentrations of risk through diversification. The following table provides breakouts of the commercial loan and lease portfolio, including held for sale, by major industry classification, by loan size and by state, illustrating the diversity and granularity of the Bancorp’s portfolio.

TABLE 23: Commercial Loan and Lease Portfolio (a)


	2007					2006
As of June 30 ($ in millions)	Outstanding			Exposure	Nonaccrual	Outstanding	Exposure	Nonaccrual
By industry:
Real estate	$	10,811		13,519	68	10,029	12,433	31
Manufacturing		5,653		12,357	25	4,805	10,507	33
Construction		5,353		8,720	98	5,403	8,961	42
Retail trade		3,834		6,785	20	3,701	6,244	11
Transportation and warehousing		2,297		2,660	3	1,945	2,280	6
Wholesale trade		1,972		3,741	18	1,906	3,574	15
Business services		1,941		3,804	19	1,927	3,536	10
Healthcare		1,940		3,505	10	1,702	2,967	8
Financial services and insurance		1,565		5,201	7	1,173	3,853	4
Individuals		1,205		1,574	12	1,629	2,157	12
Other services		1,002		1,487	11	968	1,323	15
Accommodation and food		849		1,249	11	896	1,318	10
Other		793		1,358	5	958	1,425	4
Public administration		723		941	—	815	992	—
Communication and information		622		1,189	1	617	1,234	3
Entertainment and recreation		604		856	5	539	761	1
Agribusiness		575		759	1	576	803	1
Mining		396		753	5	215	408	3
Utilities		306		1,114	—	296	1,082	—

Total	$	42,441		71,572	319	40,100	65,858	209

By loan size:
Less than $200,000		4	%	3	12	5	4	16
$200,000 to $1 million		16		11	28	18	13	30
$1 million to $5 million		30		25	43	32	27	40
$5 million to $10 million		17		15	17	18	16	14
$10 million to $25 million		22		25	—	20	24	—
Greater than $25 million		11		21	—	7	16	—

Total		100	%	100	100	100	100	100

By state:
Ohio		25	%	28	27	24	28	36
Michigan		21		19	28	22	20	20
Illinois		10		10	8	10	10	11
Florida		10		9	11	10	9	6
Indiana		9		9	15	10	9	18
Kentucky		6		6	5	6	6	6
Tennessee		3		3	3	3	3	2
Pennsylvania		1		2	—	1	2	—
Missouri		1		1	—	1	1	—
West Virginia		1		—	—	1	—	—
Out-of-footprint		13		13	3	12	12	1

Total		100	%	100	100	100	100	100

(a)

Outstanding reflects total commercial customer loan and lease balances, including held for sale and net of unearned income, and exposure reflects total commercial customer lending commitments.

Quantitative and Qualitative Disclosure about Market Risk (continued)

The commercial portfolio is characterized by 87% of outstanding balances and exposures concentrated within the Bancorp’s primary market areas of Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, and Missouri. Exclusive of the national large-ticket leasing business, the commercial portfolio is characterized by 94% of outstanding balances and 91% of exposures concentrated within these ten states. The mortgage and construction segments of the commercial portfolio are characterized by 97% of outstanding balances and 98% exposures concentrated within these ten states.

Analysis of Nonperforming Assets

A summary of nonperforming assets is included in Table 24. Nonperforming assets include: (i) nonaccrual loans and leases for which ultimate collectibility of the full amount of the principal and/or interest is uncertain; (ii) loans and leases that have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower and (iii) other assets, including other real estate owned and repossessed equipment. Loans are placed on nonaccrual status when the principal or interest is past due 90 days or more (unless the loan is both well secured and in process of collection) and payment of the full principal and/or interest under the contractual terms of the loan are not expected. Additionally, loans are placed on nonaccrual status upon deterioration of the financial condition of the borrower. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premium, accretion of loan discount and amortization or accretion of deferred net loan fees or costs are discontinued and previously accrued but unpaid interest is reversed. Commercial loans on nonaccrual status are reviewed for impairment at least quarterly. If the principal or a portion of principal is deemed a loss, the loss amount is charged off to the allowance for loan and lease losses.

As of June 30, 2007, nonaccrual credits as a percent of total loans and leases were .54%, compared to .39% as of June 30, 2006. Commercial nonaccrual credits as a percent of commercial loans increased since the second quarter of 2006, from .52% to .75%. The majority of the increase was driven by the real estate and construction industries in the Florida and Michigan affiliates. Michigan affiliates nonaccrual credits increased $46 million with two relationships contributing to approximately 40% of the increase. Florida affiliates nonaccrual credits increased $22 million compared to June 30, 2006. Consumer nonaccrual credits as a percent of consumer loans increased since the second quarter of 2006, from .22% to .26%. The increase in consumer nonaccrual credits was also driven primarily by the Michigan and Florida affiliates. As of June 30, 2007, 70% of total nonaccrual credits were secured by real estate compared to 61% as of June 30, 2006. Total nonperforming assets were $528 million at June 30, 2007, compared to $455 million at December 31, 2006 and $358 million at June 30, 2006. Nonperforming assets as percentage of total loans, leases and other assets, including other real estate owned increased to .70% as of June 30, 2007 compared to .61% as of December 31, 2006 and .49% as of June 30, 2006.

Total loans and leases 90 days past due have increased from $191 million as of June 30, 2006 to $302 million as of June 30, 2007, with the majority of the increase in the real estate and construction industries in the Michigan and Florida affiliates.

TABLE 24: Summary of Nonperforming Assets and Delinquent Loans


($ in millions)	June 30, 2007			December 31, 2006	June 30, 2006
Commercial loans	$	137		127	124
Commercial mortgage		113		84	62
Commercial construction		65		54	18
Commercial leases		4		6	5
Residential mortgage		40		38	34
Consumer loans and leases (a)		47		43	38

Total nonaccrual loans and leases		406		352	281
Other assets, including other real estate owned		122		103	77

Total nonperforming assets	$	528		455	358

Commercial loans	$	44		38	50
Commercial mortgage		37		17	16
Commercial construction loans		33		6	6
Commercial leases		1		2	—
Residential mortgage (b)		98		68	58
Credit card		18		16	13
Consumer loans and leases (a)		71		63	48

Total 90 days past due loans and leases	$	302		210	191

Nonperforming assets as a percent of total loans, leases and other assets, including other real estate owned		.70	%	.61	.49
Allowance for loan and lease losses as a percent of total nonperforming assets		152		170	210

(a)

Includes home equity, automobile and other consumer loans and leases.

(b)

Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of June 30, 2007, December 31, 2006 and June 30, 2006, these advances were $16 million, $14 million and $10 million, respectively.

Quantitative and Qualitative Disclosure about Market Risk (continued)

Analysis of Net Loan Charge-offs

The table below provides a summary of credit loss experience and net charge-offs as a percentage of average loans and leases outstanding by loan category:

TABLE 25: Summary of Credit Loss Experience


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2007			2006		2007		2006
Losses charged off:
Commercial loans	$	(29	)	(31	)	(48	)	(66	)
Commercial mortgage loans		(16	)	(5	)	(23	)	(8	)
Commercial construction loans		(7	)	(3	)	(13	)	(3	)
Commercial leases		—		(2	)	(1	)	(2	)
Residential mortgage loans		(9	)	(6	)	(16	)	(10	)
Home equity		(22	)	(16	)	(41	)	(33	)
Automobile loans		(24	)	(19	)	(49	)	(41	)
Credit card		(12	)	(9	)	(23	)	(16	)
Other consumer loans and leases		(5	)	(5	)	(9	)	(14	)

Total losses		(124	)	(96	)	(223	)	(193	)
Recoveries of losses previously charged off:
Commercial loans		5		9		9		12
Commercial mortgage loans		—		1		1		1
Commercial construction loans		—		—		—		—
Commercial leases		—		1		1		3
Residential mortgage loans		—		—		—		—
Home equity		2		3		5		6
Automobile loans		9		9		18		18
Credit card		2		2		5		3
Other consumer loans and leases		4		4		11		10

Total recoveries		22		29		50		53
Net losses charged off:
Commercial loans		(24	)	(22	)	(39	)	(54	)
Commercial mortgage loans		(16	)	(4	)	(22	)	(7	)
Commercial construction loans		(7	)	(3	)	(13	)	(3	)
Commercial leases		—		(1	)	—		1
Residential mortgage loans		(9	)	(6	)	(16	)	(10	)
Home equity		(20	)	(13	)	(36	)	(27	)
Automobile loans		(15	)	(10	)	(31	)	(23	)
Credit card		(10	)	(7	)	(18	)	(13	)
Other consumer loans and leases		(1	)	(1	)	2		(4	)

Total net losses charged off	$	(102	)	(67	)	(173	)	(140	)

Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans		.44	%	.44		.37		.54
Commercial mortgage loans		.56		.18		.41		.14
Commercial construction loans		.48		.18		.42		.08
Commercial leases		.02		.03		.02		(.04	)

Total commercial loans		.44		.30		.36		.32

Residential mortgage loans		.43		.22		.38		.24
Home equity		.66		.43		.61		.46
Automobile loans		.58		.43		.59		.50
Credit card		3.28		3.43		3.28		3.30
Other consumer loans and leases		.78		.82		(.26	)	.65

Total consumer loans		.68		.46		.61		.49

Total net losses charged off		.55	%	.37		.47		.40

Net charge-offs as a percent of average loans and leases outstanding were 55 bp in the second quarter of 2007, an increase from 52 bp and 37 bp for the quarter ended December 31, 2006 and June 30, 2006, respectively. Total commercial loan net charge-offs included $3 million in losses related to the sale of $27 million in nonperforming commercial loans in the second quarter of 2007. The Bancorp’s higher rate of charge-offs in the second quarter of 2007 compared to 2006 was mostly concentrated in the real estate markets of the Florida and Michigan affiliates. Overall, the Bancorp expects the 2007 charge-off ratio to be in the low 50 bp range.

Quantitative and Qualitative Disclosure about Market Risk (continued)

Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan and lease losses and the reserve for unfunded commitments. The allowance for loan and lease losses provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the allowance each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall allowance for loan and lease losses, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net charge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall percentage level of the allowance for loan and lease losses. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and current national and local economic conditions that might impact the portfolio. The Bancorp continues to monitor recent developments in the credit markets. The Bancorp does not anticipate further deterioration to result in material adverse changes in its financial condition or liquidity.

In the current year, the Bancorp has not substantively changed any material aspect to its overall approach in the determination of the allowance for loan and lease losses and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the allowance for loan and lease losses, the Bancorp maintains a reserve for unfunded commitments (recorded in other liabilities on the Condensed Consolidated Balance Sheet). The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the allowance for loan and lease losses. The provision for unfunded commitments is included in other noninterest expense on the Condensed Consolidated Statements of Income.

TABLE 26: Changes in Allowance for Credit Losses


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2007			2006		2007		2006
Allowance for loan and lease losses:
Beginning balance	$	784		749		771		744
Net losses charged off		(102	)	(67	)	(173	)	(140	)
Provision for loan and lease losses		121		71		205		149

Ending balance	$	803		753		803		753

Reserve for unfunded commitments:
Beginning balance	$	79		69		76		70
Provision for unfunded commitments		(2	)	5		1		4

Ending balance	$	77		74		77		74

The allowance for loan and lease losses as a percent of the total loan and lease portfolio increased to 1.06% at June 30, 2007 from 1.04 at December 31, 2006 and 1.04% at June 30, 2006.

Residential Mortgage Portfolio

Certain mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing prices. These types of mortgage products offered by the Bancorp include high loan-to-value (“LTV”) ratios, multiple loans on the same collateral that when combined result in a high LTV (“80/20”) and interest-only loans. Table 27 provides the amount of these loans as a percent of the residential mortgage loans in the Bancorp’s portfolio and the delinquency rates of these loan products as of June 30, 2007 and 2006. Table 28 shows the Bancorp’s originations of these products for the three months ended June 30, 2007 and 2006. The Bancorp does not currently originate mortgage loans that permit principal payment deferral or payments that are less than the accruing interest.

TABLE 27: Residential Mortgage Outstandings


	2007						2006
As of June 30 ($ in millions)	Amount		Percent of total		Delinquency Ratio		Amount		Percent of total		Delinquency Ratio
Greater than 80% LTV with no mortgage insurance	$	1,903	23	%	5.57	%	$	1,871	22	%	3.23	%
Interest-only		1,257	15		.65			1,218	14		.07
Greater than 80% LTV and interest-only		525	6		1.95			554	6		.39
80/20 loans		—	—		—			33	—		.25

The Bancorp also sells certain of these mortgage products in the secondary market with recourse. The outstanding balances and delinquency rates for these loans sold with recourse as of June 30, 2007 and 2006 were $1.6 billion and 1.78% and $947 million and 1.47%, respectively.

Quantitative and Qualitative Disclosure about Market Risk (continued)

TABLE 28: Residential Mortgage Originations


	2007				2006
($ in millions)	Amount		Percent of total		Amount		Percent of total
For the three months ended June 30:
Greater than 80% LTV with no mortgage insurance	$	90	3	%	$	208	8	%
Interest-only		563	18			334	13
Greater than 80% LTV and interest-only		4	—			52	2
80/20 loans		64	2			132	5
80/20 loans and interest-only		6	—			—	—

For the six months ended June 30:
Greater than 80% LTV with no mortgage insurance		198	3			392	8
Interest-only		1,058	18			614	13
Greater than 80% LTV and interest-only		19	—			153	3
80/20 loans		111	2			232	5
80/20 loans and interest-only		44	1			—	—

The Bancorp manages credit risk in the mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio without recourse or may purchase mortgage insurance for the loans sold in order to mitigate credit risk.

The Bancorp originates Alt-A loans for sale in the secondary market. For the three and six months ended June 30, 2007, the Bancorp originated $447 million and $871 million of Alt-A loans. During the first quarter of 2007, secondary market conditions worsened for these products, and, as a result, approximately $43 million of loans were moved from held for sale to portfolio, and an impairment charge of approximately $2 million was recognized in mortgage banking net revenue. The Bancorp does not plan to originate these mortgages for investment purposes and has not sold Alt-A mortgages with recourse.

MARKET RISK MANAGEMENT

Market risk arises from the potential for fluctuations in interest rates, foreign exchange rates and equity prices that may result in potential reductions in net income. Interest rate risk, a component of market risk, is the exposure to adverse changes in net interest income or financial position due to changes in interest rates. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons:

•

Assets and liabilities may mature or reprice at different times;

•

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

•

The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change.

In addition to the direct impact of interest rate changes on net interest income, interest rates can indirectly impact earnings through their effect on loan demand, credit losses, mortgage origination fees, the value of servicing rights and other sources of the Bancorp’s earnings. Stability of the Bancorp’s net interest income is largely dependent upon the effective management of interest rate risk. Management continually reviews the Bancorp’s balance sheet composition and models the interest rate risk, and possible actions to reduce this risk, given numerous future interest rate scenarios.

Net Interest Income Simulation Model

The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk, including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Bancorp’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions on the balance sheet. Actual results will differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Bancorp’s Executive Asset Liability Committee (“ALCO”), which includes senior management representatives and is accountable to the Risk and Compliance Committee of the Board of Directors, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities. The Bancorp’s current interest rate risk exposure is determined by measuring the anticipated change in net interest income over 12-month and 24-month horizons assuming a 200 bp parallel ramped increase or decrease in market interest rates. In accordance with the current policy, the rate movements are assumed to occur over one year and are sustained thereafter.

Quantitative and Qualitative Disclosure about Market Risk (continued)

The following table shows the Bancorp’s estimated earnings sensitivity profile and the ALCO policy limits on the asset and liability positions as of June 30, 2007:

TABLE 29: Estimated Earnings Sensitivity Profile


	Change in Net Interest Income (FTE)			ALCO Policy Limits
Change in Interest Rates (bp)	12 Months		13 to 24 Months	12 Months		13 to 24 Months
+200	(.11	)%	1.78	(5.00	)	(7.00	)
+100	(.09	)	.84	—		—
-100	.62		.75	—		—
-200	1.55		.26	(5.00	)	(7.00	)

Economic Value of Equity

The Bancorp also employs economic value of equity (“EVE”) as a measurement tool in managing interest rate sensitivity. Whereas net interest income simulation highlights exposures over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet and derivative positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset and derivative cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term interest rate risk. In contrast to the net interest income simulation, which assumes interest rates will change over a period of time, EVE uses instantaneous changes in rates. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the net interest income simulation model. As with the net interest income simulation model, assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected changes in balances and pricing of the transaction deposit portfolios.

The following table shows the Bancorp’s EVE sensitivity profile and the ALCO policy limits as of June 30, 2007:

TABLE 30: Estimated EVE Sensitivity Profile


Change in Interest Rates (bp)	Change in EVE		ALCO Policy Limits
+200	(5.37	)%	(20.0	)
-200	3.20		(20.0	)

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 (i.e., 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 the adverse impact of changes in interest rates. The net interest income simulation and EVE analyses do not necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes in interest rates.

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 unplanned fluctuations in earnings and cash flows 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, principal only swaps, options and swaptions.

As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge interest rate lock commitments that are also considered free-standing derivatives.

The Bancorp also establishes derivative contracts with reputable third parties to economically hedge significant exposures assumed in commercial customer accommodation derivative contracts. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risks arise from the possible inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through approvals, limits and monitoring procedures. The notional amount and fair values of these derivatives as of June 30, 2007 are included in Note 5 of the Notes to the Condensed Consolidated Financial Statements.

Quantitative and Qualitative Disclosure about Market Risk (continued)

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. The following table summarizes the expected principal cash flows of the Bancorp’s portfolio loans and leases as of June 30, 2007:

TABLE 31: Portfolio Loan and Lease Principal Cash Flows


($ in millions)	Less than 1 year		1 – 5 years	Greater than 5 years	Total
Commercial loans	$	12,665	8,163	1,324	22,152
Commercial mortgage loans		4,711	4,743	1,590	11,044
Commercial construction loans		3,912	1,335	222	5,469
Commercial leases		1,001	1,855	841	3,697

Subtotal - commercial loans		22,289	16,096	3,977	42,362

Residential mortgage loans		2,396	3,774	2,307	8,477
Home equity		2,629	5,611	3,540	11,780
Automobile loans		3,823	6,195	696	10,714
Credit card		172	1,091	—	1,263
Other consumer loans and leases		450	637	26	1,113

Subtotal - consumer loans		9,470	17,308	6,569	33,347

Total	$	31,759	33,404	10,546	75,709

Segregated by interest rate type, the following is a summary of expected principal cash flows occurring after one year as of June 30, 2007:

TABLE 32: Portfolio Loan and Lease Principal Cash Flows Occurring After One Year


	Interest Rate
($ in millions)	Fixed		Floating or Adjustable
Commercial loans	$	2,545	6,942
Commercial mortgage loans		2,211	4,122
Commercial construction loans		278	1,279
Commercial leases		2,696	—

Subtotal - commercial loans		7,730	12,343

Residential mortgage loans		3,397	2,684
Home equity		1,589	7,562
Automobile loans		6,891	—
Credit card		250	841
Other consumer loans and leases		519	144

Subtotal - consumer loans		12,646	11,231

Total	$	20,376	23,574

Mortgage Servicing Rights and Interest Rate Risk

The net carrying amount of the MSR portfolio was $602 million and $483 million as of June 30, 2007 and June 30, 2006, respectively. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity, including consultation with an independent third-party specialist, in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates. The 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 increase in interest rates during the second quarters of 2007 and 2006 and the resulting impact of changing prepayment speeds led to the recovery in temporary impairment of $12 million and $6 million for the three months ended June 30, 2007 and 2006, respectively. Servicing rights are deemed impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. The Bancorp recognized a net loss of $9 million and $5 million for the three months ended June 30, 2007 and 2006, respectively, related to changes in the fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further discussion on servicing rights.

Quantitative and Qualitative Disclosure about Market Risk (continued)

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 on the Condensed Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at June 30, 2007 and June 30, 2006 was approximately $202 million and $149 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations. The Bancorp has internal controls in place to 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.

LIQUIDITY RISK MANAGEMENT

The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or unexpected deposit withdrawals. This goal is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the national money markets and delivering consistent growth in core deposits. The estimated weighted-average life of the available-for-sale portfolio was 5.5 years at June 30, 2007, based on current prepayment expectations. Of the $11.0 billion (fair value basis) of securities in the available-for-sale portfolio at June 30, 2007, $1.8 billion in principal and interest is expected to be received in the next 12 months, and an additional $1.6 billion is expected to be received in the next 13 to 24 months. In addition to the sale of available-for-sale securities, asset-driven liquidity is provided by the Bancorp’s ability to sell or securitize loan and lease assets. 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 Federal National Mortgage Association (“FNMA”) guidelines are sold for cash upon origination. Additional assets such as jumbo fixed-rate residential mortgages, certain floating rate short-term commercial loans, certain floating-rate home equity loans, certain automobile loans and other consumer loans are also capable of being securitized, sold or transferred off-balance sheet. For the three months ended June 30, 2007 and 2006, a total of $3.4 billion and $4.7 billion, respectively, were sold, securitized or transferred off-balance sheet.

Additionally, the Bancorp has a shelf registration in place with the U.S. Securities and Exchange Commission (“SEC”) permitting ready access to the public debt markets and qualifies as a “well-known seasoned issuer” under SEC rules. As of June 30, 2007, $2.3 billion of debt or other securities were available for issuance from this shelf registration under the current Bancorp’s Board of Directors’ authorizations. The Bancorp also has $16.1 billion of funding available for issuance through private offerings of debt securities pursuant to its bank note program. These sources, in addition to a 9.53% average equity capital base, provide the Bancorp with a stable funding base.

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 shareholders’ equity funded 69% of its average total assets during the second quarter of 2007. 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 various regional Federal Home Loan Banks as a funding source. Certificates carrying a balance of $100,000 or more and 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.

CAPITAL MANAGEMENT

The Bancorp maintains a relatively high level of capital as a margin of safety for its depositors and shareholders. At June 30, 2007, shareholders’ equity was $9.2 billion, compared to $10.0 billion at December 31, 2006 and $9.6 billion at June 30, 2006. Average shareholders’ equity as a percentage of average assets for the second quarter of 2007 was 9.53% compared to 9.09% in the same quarter last year. Tangible equity as a percent of tangible assets was 6.92% at June 30, 2007 and 2006, respectively. Overall, capital ratios remain consistent with the prior year as the reduction of assets resulting from the balance sheet actions in the fourth quarter of 2006 was offset by share repurchases throughout 2007. On August 1, 2007, Fifth Third Capital Trust V, a wholly-owned non-consolidated subsidiary of the Bancorp, issued $500 million of Tier I-qualifying trust preferred securities to third party investors and invested the proceeds in junior subordinated notes issued by the Bancorp. The issuance added approximately 47 bp to each of the Bancorp’s regulatory capital ratios. See Note 18 for further discussion of this issuance.

The Federal Reserve Board adopted quantitative measures that assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios). The guidelines define “well-capitalized” ratios of Tier I, total risk-based capital and leverage as 6%, 10% and 5%, respectively. The Bancorp exceeded these “well-capitalized” ratios for all periods presented.

Quantitative and Qualitative Disclosure about Market Risk (continued)

TABLE 33: Regulatory Capital


($ in millions)	June 30, 2007			December 31, 2006	June 30, 2006
Tier I capital	$	8,616		8,625	8,660
Total risk-based capital		11,163		11,385	10,617
Risk-weighted assets		105,950		102,823	101,126
Regulatory capital ratios:
Tier I capital		8.13	%	8.39	8.56
Total risked-based capital		10.54		11.07	10.50
Tier I leverage		8.76		8.44	8.38

Dividend Policy

The Bancorp’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain adequate capital levels and alternative investment opportunities. The Bancorp’s quarterly dividend for the second quarter of 2007 was $.42 per share, consistent with the first quarter of 2007 quarterly dividend and an increase of five percent over the $.40 per share declared in the second quarter of 2006.

Stock Repurchase Program

On January 18, 2005, the Bancorp announced that its Board of Directors had authorized management to purchase 20 million shares of the Bancorp’s common stock through the open market or in any private transaction. The timing of the purchases and the exact number of shares to be purchased was dependent upon market conditions. The authorization did not include specific price targets or an expiration date. During the second quarter of 2007, the Bancorp repurchased the remaining 9 million shares under this authorization.

On May 21, 2007, the Bancorp announced that its Board of Directors had authorized management to purchase 30 million shares of the Bancorp’s common stock through the open market or in any private transaction. The timing of the purchases and the exact number of shares to be purchased depends upon market conditions. The authorization does not include specific price targets or an expiration date. During the second quarter of 2007, the Bancorp repurchased approximately 8 million shares under this authorization. At June 30, 2007, the Bancorp had approximately 22 million shares remaining under the current Board of Directors’ authorization.

The Bancorp’s stock repurchase program is an important element of its capital planning activities and the Bancorp views share repurchases as an effective means of delivering value to shareholders. The Bancorp’s second quarter 2007 repurchases of common shares were as follows:

TABLE 34: Share Repurchases


Period	Total Number of Shares Purchased *(a)*	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2007 – April 30, 2007	3,240,487	$	40.45	3,193,000	5,614,045
May 1, 2007 – May 31, 2007	8,784,654	$	41.49	8,683,966	26,930,079
June 1, 2007 – June 30, 2007	4,842,376	$	42.20	4,822,661	22,107,418

Total	16,867,517	$	41.49	16,699,627	22,107,418

(a)

The Bancorp repurchased 47,487, 100,688 and 19,715 shares during April, May and June of 2007, respectively, in connection with various employee compensation plans. These purchases are not included against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.

OFF-BALANCE SHEET ARRANGEMENTS

The Bancorp consolidates all of its majority-owned subsidiaries for which the Bancorp is the primary beneficiary. Other entities, including certain joint ventures, in which there is greater than 20% ownership, but upon which the Bancorp does not possess, nor can exert, significant influence or control, are accounted for by equity method accounting and not consolidated. Those entities in which there is less than 20% ownership are generally carried at the lower of cost or fair value.

Quantitative and Qualitative Disclosure about Market Risk (continued)

The Bancorp’s derivative product policy and investment policies provide a framework within which the Bancorp and its affiliates may use certain authorized financial derivatives as a market risk management tool in meeting the Bancorp’s ALCO capital planning directives and to hedge changes in fair value of its largely fixed-rate mortgage servicing rights portfolio. The Bancorp also provides qualifying commercial customers access to the derivative market, including foreign exchange, interest rate and commodity 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 matching terms that are generally settled daily. These policies are reviewed and approved annually by the Risk and Compliance Committee of the Board of Directors.

Through June 30, 2007 and 2006, the Bancorp had transferred, subject to credit recourse, certain primarily floating-rate, short-term, investment grade commercial loans to an unconsolidated qualified special purpose entity (“QSPE”) that is wholly owned by an independent third-party. The outstanding balance of such loans at June 30, 2007 and 2006 was $3.3 billion and $3.4 billion, respectively. These loans may be transferred back to the Bancorp upon the occurrence of certain specified events. These events include borrower default on the loans transferred, bankruptcy preferences initiated against underlying borrowers and ineligible loans transferred by the Bancorp to the QSPE. The maximum amount of credit risk in the event of nonperformance by the underlying borrowers is approximately equivalent to the total outstanding balance. In addition, the Bancorp’s agreement to provide liquidity support to the QSPE was $4.0 billion and $3.8 billion as of June 30, 2007 and 2006, respectively. At June 30, 2007 and 2006, the Bancorp’s loss reserve related to the liquidity support and credit enhancement provided to the QSPE was $13 million, recorded in other liabilities on the Condensed Consolidated Balance Sheets.

The Bancorp utilizes securitization trusts formed by independent third parties to facilitate the securitization process of residential mortgage loans, certain floating-rate home equity lines of credit, certain automobile loans and other consumer loans. The cash flows to and from the securitization trusts are principally limited to the initial proceeds from the securitization trust at the time of sale with subsequent cash flows relating to interests that continue to held by the transferor. The Bancorp’s securitization policy permits the retention of subordinated tranches, servicing rights, interest-only strips, residual interests, credit recourse and, in some cases, a cash reserve account. At June 30, 2007, the Bancorp had retained servicing assets totaling $607 million, subordinated tranche security interests totaling $8 million and residual interests totaling $14 million. At June 30, 2006, the Bancorp had retained servicing assets totaling $489 million, subordinated tranche security interests totaling $23 million and residual interests totaling $30 million. The Bancorp had the following cash flows with these unconsolidated QSPEs during the six months ended June 30, 2007 and 2006:

TABLE 35: Cash Flows with Unconsolidated QSPEs


For the six months ended June 30 ($ in millions)	2007		2006
Proceeds from transfers, including new securitizations	$	911	982
Proceeds from collections reinvested in revolving-period securitizations		38	51
Fees received		15	17

As of June 30, 2007 and 2006, the Bancorp had provided credit recourse on approximately $1.6 billion and $1.3 billion, respectively, of residential mortgage loans sold to unrelated third parties. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of nonperformance by the underlying borrowers is equivalent to the total outstanding balance. In the event of nonperformance, the Bancorp has rights to the underlying collateral value attached to the loan. As of June 30, 2007 and 2006, the Bancorp maintained an estimated credit loss reserve recorded in other liabilities on the Condensed Consolidated Balance Sheets of approximately $19 million relating to these residential mortgage loans sold. To determine the credit loss reserve, the Bancorp used an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio.

Quantitative and Qualitative Disclosure about Market Risk (continued)

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The Bancorp has certain obligations and commitments to make future payments under contracts. At June 30, 2007, the aggregate contractual obligations and commitments were:

TABLE 36: Contractual Obligations and Other Commitments


As of June 30, 2007 ($ in millions)	Less than 1 year		1-3 years	3-5 years	Greater than 5 years	Total
Contractually obligated payments due by period:
Total deposits	$	67,301	292	13	1,587	69,193
Long-term debt (a)		128	4,626	1,007	6,196	11,957
Short-term borrowings (b)		7,155	—	—	—	7,155
Noncancelable leases (c)		85	160	122	417	784
Partnership investment commitments (d)		254	—	—	—	254
Capital expenditures (e)		92	—	—	—	92
Purchase obligations		18	19	11	—	48

Total contractually obligated payments due by period	$	75,033	5,097	1,153	8,200	89,483

Other commitments by expiration period:

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