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 September 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 532,651,493 shares of the Registrant’s Common Stock, without par value, outstanding as of October 31, 2007.

LOGO

INDEX


Part I. Financial Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
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)
Risk Management – Overview		26
Credit Risk Management		26
Market Risk Management		31
Liquidity Risk Management		34
Capital Management		35
Off-Balance Sheet Arrangements		36
Contractual Obligations and Commitments		37
Controls and Procedures (Item 4)		38
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)		39
Statements of Income (unaudited)		40
Statements of Changes in Shareholders’ Equity (unaudited)		41
Statements of Cash Flows (unaudited)		42
Notes to Condensed Consolidated Financial Statements (unaudited)		43

Part II. Other Information
Legal Proceedings (Item 1)		64
Risk Factors (Item 1A)		65
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		65
Exhibits (Item 6)		66
Signatures		67
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 September 30,				Percent Change		For the nine months ended September 30,				Percent Change
($ in millions, except per share data)	2007			2006	Percent Change		2007			2006	Percent Change
Income Statement Data
Net interest income (a)	$	760		719	6		$	2,247		2,154	4
Noninterest income		722		662	9			2,077		1,934	7
Total revenue (a)		1,482		1,381	7			4,324		4,088	6
Provision for loan and lease losses		139		87	59			344		236	45
Noninterest expense		894		767	16			2,489		2,257	10
Net income		325		377	(14	)		1,059		1,123	(6	)

Common Share Data
Earnings per share, basic	$	.61		.68	(10	)	$	1.96		2.02	(3	)
Earnings per share, diluted		.61		.68	(10	)		1.95		2.01	(3	)
Cash dividends per common share		.42		.40	5			1.26		1.18	7
Book value per share		17.45		17.96	(3	)
Dividend payout ratio		68.6	%	59.2	16			64.1	%	58.6	9

Financial Ratios
Return on average assets		1.26	%	1.41	(11	)		1.41	%	1.42	(1	)
Return on average equity		13.8		15.1	(9	)		14.7		15.5	(5	)
Average equity as a percent of average assets		9.13		9.33	(2	)		9.56		9.19	4
Tangible equity		6.83		7.40	(8	)
Net interest margin (a)		3.34		2.99	12			3.38		3.03	12
Efficiency (a)		60.3		55.5	9			57.6		55.2	4

Credit Quality
Net losses charged off	$	115		79	46		$	288		219	32
Net losses charged off as a percent of average loans and leases		.60	%	.43	40			.51	%	.41	24
Allowance for loan and lease losses as a percent of loans and leases		1.08		1.04	4
Allowance for credit losses as a percent of loans and leases (b)		1.19		1.14	4
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned		.92		.56	64

Average Balances
Loans and leases, including held for sale	$	78,244		73,938	6		$	77,060		72,896	6
Total securities and other short-term investments		12,129		21,582	(44	)		11,839		22,309	(47	)
Total assets		102,131		105,868	(4	)		100,707		105,452	(4	)
Transaction deposits (c)		50,922		49,313	3			50,657		49,549	2
Core deposits (d)		61,212		60,107	2			61,357		59,883	2
Wholesale funding (e)		28,001		32,270	(13	)		25,875		32,396	(20	)
Shareholders’ equity		9,325		9,878	(6	)		9,629		9,696	(1	)

Regulatory Capital Ratios
Tier I capital		8.46	%	8.64	(2	)
Total risk-based capital		10.87		10.61	2
Tier I leverage		9.23		8.52	8

(a)

Amounts presented on a fully taxable equivalent basis. The taxable equivalent adjustments for the three months ended September 30, 2007 and 2006 are $6 million and for the nine months ended September 30, 2007 and 2006 are $18 million and $20 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, money market and foreign office deposits of commercial customers.

(d)

Includes transaction deposits plus other time deposits.

(e)

Includes certificates $100,000 and over, other 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 September 30, 2007, the Bancorp had $104.3 billion in assets, operated 18 affiliates with 1,181 full-service Banking Centers including 104 Bank Mart^® locations open seven days a week inside select grocery stores and 2,153 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 September 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 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 Crown acquisition closed in the fourth quarter. In August 2007, the Bancorp announced an agreement with First Charter Corporation to acquire First Charter Bank, a regional financial services company with assets of $4.9 billion and operates 57 branches in North Carolina and two in suburban Atlanta. The First Charter acquisition is subject to legal, regulatory and First Charter’s shareholders approvals and is expected to close in the first quarter of 2008. In September 2007, the Bancorp agreed to purchase nine full service bank branches in Atlanta, Georgia from First Horizon National Corporation. This transaction is expected to close in the first quarter of 2008.

Earnings Summary

The Bancorp’s net income was $325 million, or $.61 per diluted share, in the third quarter of 2007, compared to $377 million, or $.68 per diluted share, for the same period last year. The Bancorp’s net income reflects a $78 million pretax expense resulting from the Visa/American Express anti-trust litigation settlement announced by Visa on November 7, 2007. For more information see Note 19 of the Notes to Condensed Consolidated Financial Statements.

Net interest income (FTE) increased six percent compared to the same period last year. Net interest margin was 3.34% in the third quarter of 2007, a decrease from 3.37% in the second quarter of 2007 and an increase from 2.99% in the same period last year. The

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

increase from the third 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 2007 and corresponding reduction in free funding.

Noninterest income increased nine percent and seven percent for the three and nine months ended September 30, 2007, respectively, with strong growth in nearly all captions. Noninterest expense increased 16% and ten percent for the three and nine months ended September 30, 2007, respectively, due primarily to expense associated with the Visa/American Express anti-trust litigation settlement, 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 .60% in the third quarter of 2007 compared to .55% in the second quarter of 2007 and .43% in the third quarter of 2006. The increased charge-offs were primarily driven by losses in the auto and home equity portfolios. At September 30, 2007, nonperforming assets as a percent of loans and leases increased to ..92% from .70% at June 30, 2007 and .56% at September 30, 2006. The increase in nonperforming assets was primarily concentrated in the Michigan and Florida real estate markets.

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 September 30, 2007, the Tier I capital ratio was 8.46%, the Tier I leverage ratio was 9.23% and the total risk-based capital ratio was 10.87%. The Bancorp had senior debt ratings of “Aa3” with Moody’s and “A+” with Standard & Poor’s at September 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 through acquisitions and de novo expansion. During the third quarter of 2007, the Bancorp opened 14 additional banking centers.

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 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 historical 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.

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

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 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.

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 $59 million at September 30, 2007. The Bancorp’s determination of the allowance for residential and consumer 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 $28 million at September 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 estimated loss rates 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 estimated 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 September 30, 2007, 95% 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 September 30, 2007, due to immediate 10% and 20% adverse changes in the current prepayment assumption would be approximately $26 million and $50 million, respectively, and due to immediate 10% and 20% favorable changes in the current prepayment assumption would be approximately $28 million and $59 million, respectively. The change in the fair value of the MSR portfolio at September 30, 2007, due to immediate 10% and 20% adverse changes in the discount rate assumption would be approximately $25 million and $47 million, respectively, and due to immediate 10% and 20% favorable changes in the discount rate assumption would be approximately $26 million and $55 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, changes 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 and other interest-earning assets less the interest paid for core deposits (which includes transaction deposits plus foreign office and other time deposits) and wholesale funding (which includes certificates $100,000 and over, other 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 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 was $760 million for the third quarter of 2007, an increase of $15 million from the second quarter and $41 million from the third quarter of 2006. The improved performance from the same quarter last year 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%. Net interest income increased $15 million sequentially due to increases in commercial loan volumes, a benefit of $6 million in dividend rate adjustments associated with the agreement to repurchase all issued and outstanding shares of Fifth Third’s REIT Series B Preferred Stock, modest decreases in consumer deposit rates and an additional day in the quarter.

Net interest margin decreased to 3.34% in the third quarter compared to 3.37% in the second quarter of 2007. The decline in net interest margin was primarily due to the Bancorp’s net free funding position, calculated as total noninterest-bearing liabilities and shareholders’ equity less noninterest-earning assets, declining $721 million, or five percent, to $14.3 billion due to share repurchase activity of $693 million and $110 million in the second and third quarters of 2007, respectively. The third quarter net interest margin increased 35 basis points (“bp”) from 2.99% in the third quarter of the prior year, and net interest spread increased 44 bp on a year-over-year basis. The improvement in the net interest margin and net interest spread from the prior year is attributable to the balance sheet actions taken in the fourth quarter of 2006.

Total average interest-earning assets increased seven percent on an annualized sequential basis and declined five percent from the third quarter of 2006. The increase compared to the second quarter was the result of growth in other short-term investments and credit card balances. Other short-term investments grew $286 million to $459 million in the third quarter of 2007 from the second quarter of 2007 due to larger reverse repurchase agreements. Average credit card balances grew nine percent compared to the second quarter as the Bancorp increased its focus on growing its credit card business within its deposit customer base. The decline compared to the prior year is the result of the sales of securities in the fourth quarter of 2006 partially offset by the six percent increase in loan growth.

Interest income (FTE) from loans and leases increased $82 million, or six percent, compared to the third quarter of 2006. The increase resulted from the growth in average loans and leases of six percent in the third quarter of 2007 over the comparable period in 2006 as well as a 3 bp increase in average rates. As of September 30, 2007, approximately 70% of commercial loans will mature or re-price in the next 12 months.

Interest income (FTE) from investment securities and short-term investments decreased $87 million to $156 million in the third quarter of 2007 compared to the same period in 2006. The average yield on taxable securities was 5.00%, an increase of 61 bp from the third quarter of last year. The decrease in interest income and increase in yield resulted from the sale of $11.3 billion of securities with a weighted average yield of 4.30% during the fourth quarter 2006.

Average interest-bearing core deposits increased $1.6 billion or three percent, compared to the third quarter of last year. Beginning in the third quarter of 2007, the Bancorp began reporting commercial customer Eurodollar sweeps in core deposits. The interest rates paid on these accounts are comparable to other commercial deposit accounts. During the third 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 continued to be impacted by the migration of interest checking accounts into savings accounts as interest rates on savings accounts are greater than interest checking. During the third quarter of 2007, interest checking balances represented 30% of the average interest-bearing core deposits, compared to 35% in the third quarter of 2006.

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	September 30, 2007							September 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	$	22,345		$	420	7.45	%	$	20,879		$	389	7.39	%	$	28		$	3		$	31
Commercial mortgage		11,117			205	7.31			9,833			181	7.31			24			—			24
Commercial construction		5,499			105	7.55			5,913			118	7.90			(8	)		(5	)		(13	)
Commercial leases		3,700			39	4.23			3,740			46	4.85			(1	)		(6	)		(7	)

Subtotal – commercial		42,661			769	7.15			40,365			734	7.21			43			(8	)		35
Residential mortgage loans		10,396			160	6.12			9,699			146	5.96			10			4			14
Home equity		11,752			226	7.63			12,174			235	7.67			(8	)		(1	)		(9	)
Automobile loans		10,865			174	6.34			9,522			140	5.84			21			13			34
Credit card		1,366			34	10.03			870			26	12.06			13			(5	)		8
Other consumer loans/leases		1,204			16	5.23			1,308			16	4.77			(1	)		1			—

Subtotal – consumer		35,583			610	6.80			33,573			563	6.66			35			12			47

Total loans and leases		78,244			1,379	6.99			73,938			1,297	6.96			78			4			82
Securities:
Taxable		11,180			141	5.00			20,836			231	4.39			(118	)		28			(90	)
Exempt from income taxes (b)		490			9	7.17			587			10	7.29			(1	)		—			(1	)
Other short-term investments		459			6	5.35			159			2	5.69			4			—			4

Total interest-earning assets		90,373			1,535	6.74			95,520			1,540	6.40			(37	)		32			(5	)
Cash and due from banks		2,228							2,355
Other assets		10,330							8,745
Allowance for loan and lease losses		(800	)						(752	)

Total assets	$	102,131						$	105,868

Liabilities
Interest-bearing liabilities:
Interest checking	$	14,334		$	77	2.14	%	$	16,251		$	102	2.49	%	$	(11	)	$	(14	)	$	(25	)
Savings		15,390			122	3.15			12,279			95	3.08			25			2			27
Money market		6,247			69	4.35			6,371			69	4.30			(1	)		1			—
Foreign office deposits		1,808			20	4.33			770			8	4.11			11			1			12
Other time deposits		10,290			119	4.61			10,794			116	4.24			(7	)		10			3
Certificates—$100,000 and over		6,062			78	5.11			6,415			81	5.03			(4	)		1			(3	)
Other foreign office deposits		1,981			26	5.12			2,898			39	5.30			(12	)		(1	)		(13	)
Federal funds purchased		4,322			56	5.15			4,546			61	5.33			(3	)		(2	)		(5	)
Other short-term borrowings		3,285			37	4.50			4,056			45	4.42			(9	)		1			(8	)
Long-term debt		12,351			171	5.47			14,355			205	5.66			(27	)		(7	)		(34	)

Total interest-bearing liabilities		76,070			775	4.04			78,735			821	4.14			(38	)		(8	)		(46	)
Demand deposits		13,143							13,642
Other liabilities		3,593							3,613

Total liabilities		92,806							95,990
Shareholders’ equity		9,325							9,878

Total liabilities and shareholders’ equity	$	102,131						$	105,868

Net interest income				$	760						$	719			$	1		$	40		$	41
Net interest margin						3.34	%						2.99	%
Net interest rate spread						2.70							2.26
Interest-bearing liabilities to interest-earning assets						84.17			82.43

(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 September 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 nine months ended	September 30, 2007							September 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	$	21,619		$	1,207	7.47	%	$	20,260		$	1,079	7.12	%	$	75		$	53		$	128
Commercial mortgage		10,906			596	7.31			9,753			516	7.08			63			17			80
Commercial construction		5,701			327	7.67			5,987			340	7.58			(17	)		4			(13	)
Commercial leases		3,680			118	4.29			3,719			139	5.00			(2	)		(19	)		(21	)

Subtotal – commercial		41,906			2,248	7.17			39,719			2,074	6.98			119			55			174
Residential mortgage loans		10,255			471	6.13			9,418			416	5.90			38			17			55
Home equity		11,902			682	7.66			12,018			662	7.36			(6	)		26			20
Automobile loans		10,551			494	6.26			9,481			401	5.65			48			45			93
Credit card		1,213			98	10.82			812			71	11.68			32			(5	)		27
Other consumer loans/leases		1,233			48	5.22			1,448			53	4.92			(8	)		3			(5	)

Subtotal – consumer		35,154			1,793	6.82			33,177			1,603	6.46			104			86			190

Total loans and leases		77,060			4,041	7.01			72,896			3,677	6.74			223			141			364
Securities:
Taxable		11,054			414	5.01			21,527			712	4.42			(382	)		84			(298	)
Exempt from income taxes (b)		511			28	7.32			616			34	7.41			(6	)		—			(6	)
Other short-term investments		274			12	5.84			166			7	5.44			5			—			5

Total interest-earning assets		88,899			4,495	6.76			95,205			4,430	6.22			(160	)		225			65
Cash and due from banks		2,260							2,528
Other assets		10,332							8,467
Allowance for loan and lease losses		(784	)						(748	)

Total assets	$	100,707						$	105,452

Liabilities
Interest-bearing liabilities:
Interest checking	$	14,964		$	248	2.22	%	$	16,955		$	303	2.39	%	$	(34	)	$	(21	)	$	(55	)
Savings		14,573			350	3.21			11,979			259	2.89			60			31			91
Money market		6,289			208	4.42			6,296			188	3.99			—			20			20
Foreign office deposits		1,598			52	4.35			626			18	3.77			31			3			34
Other time deposits		10,700			369	4.61			10,334			308	4.00			12			49			61
Certificates—$100,000 and over		6,416			247	5.14			5,473			191	4.66			35			21			56
Other foreign office deposits		1,032			40	5.19			3,406			125	4.91			(92	)		7			(85	)
Federal funds purchased		3,462			135	5.24			4,328			160	4.93			(34	)		9			(25	)
Other short-term borrowings		2,689			89	4.41			4,540			142	4.18			(61	)		8			(53	)
Long-term debt		12,276			510	5.55			14,649			582	5.31			(97	)		25			(72	)

Total interest-bearing liabilities		73,999			2,248	4.06			78,586			2,276	3.87			(180	)		152			(28	)
Demand deposits		13,233							13,693
Other liabilities		3,846							3,477

Total liabilities		91,078							95,756
Shareholders’ equity		9,629							9,696

Total liabilities and shareholders’ equity	$	100,707						$	105,452

Net interest income				$	2,247						$	2,154			$	20		$	73		$	93
Net interest margin						3.38	%						3.03	%
Net interest rate spread						2.70							2.35
Interest-bearing liabilities to interest-earning assets						83.24			82.54

(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 $18 million and $20 million for the nine months ended September 30, 2007 and 2006, respectively.

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

The cost of interest-bearing core deposits was 3.36% in the third quarter of 2007, which was an increase of 3 bp from 3.33% in the third quarter of 2006 and a decrease of 6 bp from 3.42% in the second quarter of 2007. The increase in the cost of interest-bearing core deposits from the prior year was due to the mix shift from interest checking to savings as well as an increase in foreign office deposits. The decrease from the second quarter of 2007 was the result of modest decreases in consumer deposit rates. The interest on core deposits increased $17 million, or four percent, in the third quarter of 2007 over the comparable period in 2006 due to the mix shift between interest checking accounts and savings accounts and the increase of $1.6 billion in average balances. The Bancorp continues to focus on growing its core deposit balances in order to improve the funding mix and improve net interest margins.

The interest on wholesale funding decreased $63 million to $368 million, or 15%, compared to the prior year quarter primarily due to the decrease of $4.3 billion in average balances. Average short-term wholesale funding decreased $2.3 billion, or 13%, while average long-term debt decreased $2.0 billion, or 14%, in the third quarter of 2007 over the comparable period in 2006. The decline in wholesale funding balances is a result of the sale of investment securities in the fourth quarter 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 management. 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 $139 million in the third quarter of 2007 compared to $87 million in the same period last year. The $52 million increase is related to loan growth during the past year, increases in delinquencies and increases in severity of loss from the decline in the real estate market. The allowance for loan and lease losses as a percentage of loans and leases increased to 1.08% at September 30, 2007 from 1.06% at June 30, 2007 and 1.04% at September 30, 2006. The increase in allowance percentage from third quarter of 2006 is primarily due to an increase in nonperforming assets and net charge-off trends from $411 million at September 30, 2006 to $706 million at September 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 nine months ended September 30, 2007, noninterest income increased by nine 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 September 30,			Percent Change		For the nine months ended September 30,			Percent Change
($ in millions)	2007		2006	Percent Change		2007		2006	Percent Change
Electronic payment processing revenue	$	253	218	16		$	721	626	15
Service charges on deposits		151	134	13			419	395	6
Investment advisory revenue		95	89	7			288	276	4
Corporate banking revenue		91	79	15			261	236	11
Mortgage banking net revenue		26	36	(28	)		107	125	(14	)
Other noninterest income		93	87	6			267	242	10
Securities gains, net		13	19	(32	)		14	34	(59	)

Total noninterest income	$	722	662	9		$	2,077	1,934	7

Electronic payment processing revenue increased $35 million, or 16%, in the third quarter of 2007, compared to the same period last year as FTPS realized growth in each of its three main product lines: merchant processing, financial institutions and card issuer interchange. Merchant processing revenue increased 23%, to $122 million, compared to the same period in 2006 due to the continued addition of new national merchant customers and resulting increases in merchant sales volumes. The Bancorp recently signed large national merchant contracts with Walgreen Co., which converted during the quarter, and the U.S. Department of Treasury, which is in the process of conversion. Financial institutions revenue increased seven percent, to $78 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 15%, to $53 million, compared to the same period in 2006 due to continued growth in credit card volumes. Through the third quarter of 2007, the Bancorp processed over 19.6 billion transactions and handled electronic processing for over 2,400 financial institutions and approximately 155,000 merchant locations worldwide.

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

Service charges on deposits increased 13% and six percent for the three and nine months ended September 30, 2007, respectively, compared to the same period last year. The increase was driven by consumer deposit service charges, which increased 19% and 11% for the three and nine months ended September 30, 2007, respectively. Commercial deposit service charges increased five percent and one percent for the three and nine months ended September 30, 2007, respectively, compared to the same periods last year. Growth in the number of customer deposit account relationships and deposit generation continues to be a primary focus of the Bancorp.

Investment advisory revenues increased seven percent from the third quarter of 2006 primarily due to success in cross-sell initiatives within the private banking group and improved retail brokerage performance. Private banking revenue and securities and brokerage revenue increased ten percent and seven percent, respectively, in the third quarter of 2007, compared to the same period last year. Additionally, mutual fund revenue and institutional revenue increased three percent and two percent, respectively, in the third quarter of 2007, compared to the same period last year. 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 September 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 $12 million, or 15%, in the third quarter of 2007, compared to the same period last year. The growth in corporate banking revenue was largely attributable to increased institutional sales revenue, customer derivatives income and syndication fees, as well as increased letter of credit fees as the Bancorp continues to fill out its suite of commercial products. 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 decreased $10 million and $18 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods last year. The components of mortgage banking net revenue for the three and nine months ended September 30, 2007 and 2006 are shown in Table 5. Originations in the third quarter of 2007 were $3.0 billion compared to $2.3 billion in the third quarter of 2006; however, origination fees and gains on loan sales decreased $12 million compared to the same period last year as a result of lower margins on sales of mortgages affected by widening credit spreads in the residential mortgage market.

TABLE 5: Components of Mortgage Banking Net Revenue


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2007			2006		2007		2006
Origination fees and gains (losses) on loan sales	$	9		21		61		69
Servicing revenue:
Servicing fees		37		30		105		90
Servicing rights amortization		(23	)	(18	)	(66	)	(49	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		3		3		7		15

Net servicing revenue		17		15		46		56

Mortgage banking net revenue	$	26		36		107		125

Mortgage net servicing revenue increased $2 million and decreased $10 million compared to the three and nine months ended September 30, 2006, respectively. 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 September 30, 2007 and 2006 were $43.1 billion and $37.5 billion, respectively, with $33.1 billion and $27.8 billion, respectively, of residential mortgage loans serviced for others.

Temporary impairment on the MSR portfolio was $9 million and $3 million for the three months ended September 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 Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in impairment on the MSR portfolio. The Bancorp recognized a net gain of $12 million and $6 million for the three months ended September 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 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 third quarter of 2007 or 2006.

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

Other noninterest income increased six percent in the third quarter of 2007 compared to the same period last year. This increase was primarily driven by a $15 million gain recognized from the sale of FDIC deposit insurance credits. The Bancorp was allocated these one-time assessment credits based on historical deposit levels. Other noninterest income in the third quarter of 2006 included gains totaling $10.5 million from the sale of three branches in rural Indiana and the sale of $23 million of out-of footprint credit card receivables. Income from bank-owned life insurance declined to $17 million in the third quarter of 2007 from $21 million in the second quarter 2007 due to a lower crediting rate. The Bancorp expects a similar decline in the fourth quarter of 2007 subject to continuation of current market conditions. See Note 17 of the Notes to Condensed Consolidated Financial Statements for further information.

The major components of other noninterest income are as follows:

TABLE 6: Components of Other Noninterest Income


	For the three months ended September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007	2006
Bank owned life insurance income	$	17	21	59	65
Cardholder fees		14	13	40	36
Consumer loan and lease fees		13	13	33	37
Insurance income		8	7	24	21
Operating lease income		8	6	22	20
Banking center fees		7	5	20	16
Gain on loan sales		—	4	17	14
Gain on sale of FDIC deposit insurance credits		15	—	15	—
Other		11	18	37	33

Total other noninterest income	$	93	87	267	242

Net securities gains totaled $13 million in the third quarter 2007 compared with $19 million in the third quarter 2006. The gains recognized during the current quarter were a result of the sale of securities from the Bancorp’s available-for-sale securities portfolio.

Noninterest Expense

During the third quarter of 2007, the Bancorp continued its investment in the expansion of its retail distribution network and information technology infrastructure. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 60.3% and 55.5% for the third quarter of 2007 and 2006, respectively. 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 14 additional banking centers added during the third 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 September 30,			Percent Change		For the nine months ended September 30,			Percent Change
($ in millions)	2007		2006	Percent Change		2007		2006	Percent Change
Salaries, wages and incentives	$	310	288	8		$	912	875	4
Employee benefits		67	74	(10	)		222	230	(4	)
Payment processing expense		105	84	25			294	236	25
Net occupancy expense		66	63	6			199	180	11
Technology and communications		41	36	15			122	102	20
Equipment expense		30	32	(7	)		90	86	5
Other noninterest expense		275	190	44			650	548	19

Total noninterest expense	$	894	767	16		$	2,489	2,257	10

Total noninterest expense increased 16% and ten percent for the three and nine months ended September 30, 2007, respectively, primarily due to expense associated with the Visa/American Express anti-trust litigation settlement, investment in technology, higher de novo related expenses and increased volume-related processing expense. The eight percent increase in salaries, wages and incentives compared to the third quarter of 2006 was driven by revenue-based incentives expense. Employee benefits expense decreased ten percent compared to the third quarter of 2006. Benefits expense included $6 million of pension settlement expense in the current quarter compared with $8 million in the third quarter of 2006. Full time equivalent employees totaled 20,775 as of September 30, 2007 compared to 21,301 as of September 30, 2006.

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

Payment processing expense includes third-party processing expenses, network membership charges, card management fees and other bankcard processing expenses. Payment processing expense increased 25% for the three and nine months ended 2007 compared to the same periods in 2006, as a result of these primarily volume-related processing expenses. Processing volumes increased 19% and 27% for the merchant processing and financial institutions businesses, respectively, for the three months ended September 30, 2007, compared to the same quarter last year. These businesses had similar growth in processing volumes for the nine months ended September 30, 2007 over the comparable period last year. Additionally, the increase in this caption reflects the conversion of national merchant contracts during the quarter.

Net occupancy expense increased six percent and 11% for the three and nine months ended September 30, 2007 due to the addition of 36 banking centers since September 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 September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007	2006
Loan processing	$	29	27	84	67
Marketing		19	18	57	60
Travel		14	13	40	39
Postal and courier		13	12	38	37
Intangible amortization		10	11	31	33
Professional services fees		9	7	24	21
Supplies		8	7	22	21
Franchise and other taxes		7	7	16	25
Operating lease		5	4	15	14
Visa/American Express litigation settlement		78	—	78	—
Other		83	84	245	231

Total other noninterest expense	$	275	190	650	548

Total other noninterest expense increased 44% and 19% for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006 driven by the expense associated with the Visa/American Express anti-trust litigation settlement and increased loan processing costs associated with collection activities. This increase for the nine months ended September 30, 2007 was partially offset by a decline in franchise and other taxes that resulted from a favorable settlement related to the completion of certain tax audits during the second quarter of 2007. Other noninterest expense in the third quarter of 2006 included an $11 million charge associated with the early extinguishment of debt.

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 September 30,				For the nine months ended September 30,
($ in millions)	2007			2006	2007	2006
Income before income taxes and cumulative effect	$	443		521	1,473	1,575
Applicable income taxes		118		144	414	456
Effective tax rate		26.7	%	27.6	28.1	28.9

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. Income tax expense for the third quarter of 2007 also included the expiration of statutes of limitations and state income tax law changes.

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 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. 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 September 30,					For the nine months ended September 30,
($ in millions)	2007			2006		2007		2006
Commercial Banking	$	161		162		481		462
Branch Banking		168		158		495		445
Consumer Lending		20		31		89		120
Investment Advisors		25		20		72		61
Processing Solutions		(17	)	69		49		149
General Corporate and Other		(32	)	(63	)	(127	)	(114	)

Net income	$	325		377		1,059		1,123

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 September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income (FTE)	$	292	300	876	879
Provision for loan and lease losses		21	23	63	64
Noninterest income:
Corporate banking revenue		82	73	238	216
Service charges on deposits		35	34	105	106
Other noninterest income		21	14	61	34
Noninterest expense:
Salaries, incentives and benefits		63	58	194	180
Other noninterest expenses		128	118	379	352

Income before taxes		218	222	644	639
Applicable income taxes (a)		57	60	163	177

Net income	$	161	162	481	462

Average Balance Sheet Data
Commercial loans	$	35,551	32,991	34,786	32,307
Demand deposits		5,397	5,862	5,485	5,804
Interest checking		4,049	3,857	3,997	3,828
Savings and money market		4,250	4,859	4,374	5,077
Certificates over $100,000 and other time		1,673	1,985	1,858	1,659
Foreign office deposits		1,527	506	1,328	424

(a)

Includes taxable-equivalent adjustments of $4 million and $3 million, respectively, for the three months ended September 30, 2007 and 2006 and $10 million for the nine months ended September 30, 2007 and 2006.

Net income decreased $1 million, or one percent, compared to the third quarter of 2006 as commercial loan growth and corporate banking revenue growth was offset by a decrease in commercial demand deposits and an increase in noninterest expense. Net interest income decreased $8 million compared to the third quarter of 2006 as an increase in average loans and leases was offset by decreases in deposits, particularly commercial demand, which declined despite an increase in the number of commercial accounts due to lower average carrying balances by commercial customers. Average loans and leases increased eight percent to $35.6 billion over the prior year third quarter, with double-digit growth occurring in commercial and industrial loans. Average core deposits increased one percent compared to the third quarter of 2006. Net charge-offs declined modestly from the third quarter of 2006 although delinquencies increased primarily due to construction lending concentrated in South Florida and Eastern Michigan. The Commercial Banking segment continues to focus on managing credit risk but expects to see charge-offs trend upward during the fourth quarter.

Noninterest income increased $17 million, or 14%, compared to the same quarter last year due to a $9 million increase in corporate banking revenue and a $7 million increase in other noninterest income. Corporate banking revenue grew across all categories as the segment continues to see benefit related to the build out of its commercial product offerings. During 2007, 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 due to increased volume of operating leases.

Noninterest expense increased $15 million, or eight percent, compared to the third quarter of 2006 due to higher employee incentives and volume-related increases in operating lease expenses.

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 1,181 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 September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income	$	374	331	1,103	978
Provision for loan and lease losses		44	27	105	79
Noninterest income:
Service charges on deposits		113	97	304	279
Card issuer interchange		48	43	140	122
Merchant and financial institutions processing		9	8	24	22
Investment advisory income		23	20	69	66
Other noninterest income		29	36	95	94
Noninterest expense:
Salaries, incentives and benefits		119	112	357	341
Net occupancy and equipment expenses		43	38	128	114
Other noninterest expenses		130	114	380	339

Income before taxes		260	244	765	688
Applicable income taxes		92	86	270	243

Net income	$	168	158	495	445

Average Balance Sheet Data
Consumer loans	$	11,872	11,503	11,731	11,387
Commercial loans		5,137	5,293	5,154	5,323
Demand deposits		5,734	5,786	5,760	5,856
Interest checking		8,310	10,194	8,909	10,867
Savings and money market		15,291	12,082	14,446	11,636
Certificates over $100,000 and other time		13,073	13,649	13,626	12,691

Net income increased $10 million, or six percent, compared to the third quarter of 2006 as retail banking benefited from the increase in interest rates and double digit growth in electronic payment processing revenue and consumer service charges. 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 home equity line utilization. Average core deposits and average total deposits both increased two percent over the third quarter of 2006 with an increase in savings and money market accounts of $3.2 billion, or 27%, mitigated by a $1.9 billion, or 18%, decrease in interest checking deposits. As a result of the growth in core deposits and the related net FTP impact, net interest income increased $43 million compared to the same period last year. Net charge-offs as a percent of average loan and leases increased to 103 bp from 64 bp in the third quarter of 2006.

Noninterest income increased $18 million, or nine percent, compared to the third quarter of 2006. Service charges on deposits increased 17%, or $16 million, compared to the third quarter of 2006 driven by new account openings and higher levels of customer activity. Electronic payment processing revenue increased $6 million, or 11%, as card issuer interchange benefited from the organic growth of the Bancorp’s credit card portfolio. Card issuer interchange fees, which comprise the majority of the Branch Banking’s electronic payment processing revenues, increased from $43 million in the third quarter of 2006 to $48 million in the third quarter of 2007.

Partially offsetting revenue growth was an increase in noninterest expense of 11% compared to the third quarter of 2006, related to the Bancorp’s de novo growth strategy, which led to a 12% increase in net occupancy and equipment costs. Since the third quarter of 2006, 36 additional banking centers were opened. The Bancorp continues to position itself for sustained long-term growth through new banking center additions.

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 September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007	2006
Income Statement Data
Net interest income	$	85	90	264	275
Provision for loan and lease losses		40	24	93	64
Noninterest income:
Mortgage banking net revenue		24	35	99	120
Other noninterest income		22	15	56	62
Noninterest expense:
Salaries, incentives and benefits		19	23	63	77
Other noninterest expenses		41	45	126	131

Income before taxes		31	48	137	185
Applicable income taxes		11	17	48	65

Net income	$	20	31	89	120

Average Balance Sheet Data
Residential mortgage loans	$	10,026	9,684	9,960	9,403
Home equity		1,324	1,348	1,354	1,295
Automobile loans		9,843	8,516	9,563	8,465
Consumer leases		872	1,254	952	1,392

Net income decreased $11 million, or 36%, compared to the third quarter of 2006 due to decreased gain on sale margins and higher charge-offs. Net interest income decreased six percent from the prior year despite average loans and leases increasing six percent, due to a higher FTP charge resulting from higher noninterest-earning assets in comparison to the third quarter of 2006. Net charge-offs as a percent of average loan and leases increased from 48 bp in the third quarter of 2006 to 78 bp in the third quarter of 2007 due to greater severity of loss in the home equity portfolio related to declining real estate prices and increase of charge-offs in the automobile portfolio.

Consumer Lending had mortgage originations of $2.9 billion and $2.3 billion for the three months ended September 30, 2007 and 2006. Origination fees and gains on loan sales were $7 million, a decrease of $12 million, or 61%, compared to the third quarter of 2006. The overall decrease occurred despite the increase in mortgage originations as gains on sale were significantly affected by liquidity issues and increased credit spreads in secondary markets during the third quarter of 2007. Additionally, there was a higher mix of originations from the wholesale channel compared to the third quarter of 2006.

Noninterest expense decreased $8 million, or 12%, 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 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.* As of September 30, 2007, the Bancorp has $232 billion in assets under care and $34 billion in managed assets. The table below contains selected financial data for the Investment Advisors segment.

TABLE 14: Investment Advisors


	For the three months ended September 30,			For the nine months ended September 30,
($ in millions)	2007		2006	2007		2006
Income Statement Data
Net interest income	$	37	30	$	111	93
Provision for loan and lease losses		4	1		10	3
Noninterest income:
Investment advisory income		96	89		291	277
Other noninterest income		6	5		17	14
Noninterest expense:
Salaries, incentives and benefits		41	41		125	129
Other noninterest expenses		56	51		173	158

Income before taxes		38	31		111	94
Applicable income taxes		13	11		39	33

Net income	$	25	20	$	72	61

Average Balance Sheet Data
Loans and leases	$	3,230	3,071	$	3,169	3,062
Core deposits		4,970	4,841		5,027	4,652

Net income increased $5 million, or 25%, compared to the third quarter of 2006 as a result of increased deposits and fee growth. Net interest income increased to $37 million, an increase of $7 million as a result of average core deposit growth and the related increase in the FTP credit for these deposits. Investment advisors realized growth in most deposit categories offset by declines in interest checking.

Investment advisory income increased eight percent from the third quarter of 2006 as growth was realized in the majority of sub captions, including positive brokerage results. Increased brokerage staff contributed to the growth in brokerage income of $3 million, or 11%, during the third quarter of 2007.

Noninterest expense grew five percent as compensation and incentives were flat and other noninterest expense grew nine percent 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 ALPS Distributors, Inc., member NASD, d/b/a FTAM Funds Distributor, Inc. ALPS Distributors, Inc. and FTAM Funds Distributor, Inc. are affiliated firms through direct ownership, although ALPS Distributors, Inc. and FTAM Funds Distributor, Inc. are not affiliates of Fifth Third Bank. Fifth Third Asset Management, Inc. serves as Investment Adviser to Fifth Third Funds and receives a fee for its services.

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 September 30,				For the nine months ended September 30,
($ in millions)	2007			2006	2007		2006
Income Statement Data
Net interest income	$	1		6	$	9	19
Provision for loan and lease losses		4		2		16	6
Noninterest income:
Merchant processing		123		100		340	284
Financial institutions processing		84		76		249	221
Other noninterest income		3		6		21	12
Securities gains (losses), net		—		53		—	78
Noninterest expense:
Salaries, incentives and benefits		19		17		56	52
Payment processing expense		104		81		290	222
Other noninterest expenses		110		35		179	103

Income before taxes		(26	)	106		78	231
Applicable income taxes		(9	)	37		29	82

Net income	$	(17	)	69	$	49	149

Net income decreased $86 million compared to the third quarter of 2006 as the segment expensed $78 million associated with the Visa/American Express anti-trust litigation settlement in the third quarter of 2007 and $53 million gain from the sale of the Bancorp’s MasterCard, Inc. shares in the third quarter of 2006. Excluding these transactions, pretax income declined by $1 million, or two percent, compared to the third quarter of 2006 as revenue growth was offset by expense growth. Merchant and financial institution revenues increased by $23 million, or 23%, and $8 million, or 11%, respectively, primarily due to new national merchant customer additions and continued success in attracting financial institution customers, resulting in increased transaction volume. Strong merchant revenue growth is expected to continue as national contracts signed during the current year convert throughout the remainder of 2007.

Payment processing expense increased 29% due to higher association network charges resulting from increased transaction volume in addition to expenses related to the conversion of large national merchant contracts. Merchant transactions processed increased 19% and financial institution transactions processed increased 27% over the third 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 securities portfolio, certain non-core deposit funding, unassigned equity and certain support activities and other items not attributed to the business segments.

Net income increased by $31 million compared to the same quarter last year. The increase in net income is primarily due to $13 million in net securities gains in the current quarter compared to $34 million in net securities losses in the same quarter last year. This increase was offset by the growth in the provision for loan and leases losses, which was $26 million in the third quarter of 2007 compared to $10 million in the same quarter last year.

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)


	September 30, 2007			December 31, 2006			September 30, 2006
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	23,317	29	$	20,831	28	$	21,260	29
Commercial mortgage loans		11,178	14		10,405	14		9,879	13
Commercial construction loans		5,463	7		6,168	8		5,879	8
Commercial leases		3,710	5		3,841	5		3,752	5

Total commercial loans and leases		43,668	55		41,245	55		40,770	55

Consumer:
Residential mortgage loans		9,945	13		9,905	13		9,629	13
Home equity		11,737	15		12,154	16		12,235	16
Automobile loans		11,043	14		10,028	13		9,599	13
Credit card		1,460	2		1,004	1		876	1
Other consumer loans and leases		1,162	1		1,167	2		1,243	2

Total consumer loans and leases		35,347	45		34,258	45		33,582	45

Total loans and leases	$	79,015	100	$	75,503	100	$	74,352	100

Total loans and leases increased six percent over the third quarter of 2006. 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 period balances were not restated.

Total commercial loans and leases increased $2.9 billion, or seven percent, compared to September 30, 2006. The increase was primarily due to strong growth in commercial loans, which increased ten percent compared to the third quarter of 2006. The increase in commercial loans is attributable to growth in balances related to the disruption in wholesale capital markets. Commercial mortgage loans increased 13% over the third quarter of 2006, while commercial construction loans decreased seven percent compared to the same period reflecting the conversion of construction loans to permanent financing. The overall mix of commercial loans is consistent with prior periods.

Total consumer loans and leases increased $1.8 billion, or five percent, compared to September 30, 2006. Credit cards increased to $1.5 billion, an increase of 67%, over the third quarter of 2006, as the Bancorp continues to place an emphasis on cross-selling credit cards to its existing retail customer base. Automobile loans increased by approximately $1.4 billion, or 15%, due to more indirect financing relationships. Credit card and automobile loan growth was offset by the anticipated run-off in the consumer lease portfolio totaling $346 million since the third 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)


	September 30, 2007			December 31, 2006			September 30, 2006
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	22,345	29	$	21,228	28	$	20,879	28
Commercial mortgage loans		11,117	14		9,929	13		9,833	13
Commercial construction loans		5,499	7		6,099	8		5,913	8
Commercial leases		3,700	5		3,762	6		3,740	5

Total commercial loans and leases		42,661	55		41,018	55		40,365	54

Consumer:
Residential mortgage loans		10,396	13		10,038	13		9,699	13
Home equity		11,752	15		12,225	16		12,174	17
Automobile loans		10,865	14		9,834	13		9,522	13
Credit card		1,366	2		915	1		870	1
Other consumer loans and leases		1,204	1		1,232	2		1,308	2

Total consumer loans and leases		35,583	45		34,244	45		33,573	46

Total average loans and leases	$	78,244	100	$	75,262	100	$	73,938	100

Total portfolio loans and leases (excludes held for sale)	$	76,295		$	74,032		$	72,903

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

Average commercial loans and leases increased $2.3 billion, or six percent, compared to the third 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 nine percent over the third quarter of 2006. Growth in these products was realized in the majority of the Bancorp’s markets, including the key growth market of Nashville, which experienced 26% growth.

Average consumer loans and leases increased $2.0 billion, or six percent, compared to the third quarter of 2006 as a result of the growth in average credit card balances of $496 million and an increase in average automobile loan balances of $1.3 billion. The Bancorp experienced growth in the majority of its markets highlighted by 32% growth in Nashville, nine percent in Chicago and eight percent in Florida.

Investment Securities

Total investment securities were $11.3 billion, $11.6 billion and $20.0 billion at September 30, 2007, December 31, 2006 and September 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)	September 30, 2007		December 31, 2006	September 30, 2006
Available-for-sale and other:
U.S. Treasury and Government agencies	$	3	1,396	503
U.S. Government sponsored agencies		500	100	1,059
Obligations of states and political subdivisions		538	603	631
Agency mortgage-backed securities		8,290	7,999	14,778
Other bonds, notes and debentures		705	172	2,142
Other securities		971	966	990

Total available-for-sale and other securities	$	11,007	11,236	20,103

Held-to-maturity:
Obligations of states and political subdivisions	$	344	345	348
Other bonds, notes and debentures		2	11	11

Total held-to-maturity	$	346	356	359

During the third quarter of 2007, net unrealized losses on the available-for-sale securities portfolio decreased from $355 million at June 30, 2007 to $230 million at September 30, 2007 due to decreasing interest rates across the Treasury yield curve. At September 30, 2007, 95% 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 decreased $229 million since December 31, 2006 and decreased $9.1 billion since September 30, 2006. During the third quarter of 2007, the Bancorp purchased commercial paper from an unconsolidated qualified special purpose entity (“QSPE”) that is wholly owned by an independent third party. As of September 30, 2007, the Bancorp held approximately $547 million of this commercial paper in its available-for-sale securities portfolio. See Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the unconsolidated QSPE. Approximately $1.4 billion in U.S. Treasury and Government agency securities were reinvested into agency mortgage-backed securities throughout 2007. Additionally, the Bancorp sold approximately $747 million of certain agency mortgage-backed securities during the third quarter of 2007 to reduce exposure to slowing prepayment speeds. The overall decrease from the third 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 September 30, 2007, available-for-sale securities were 12% of interest-earning assets, down from 13% at December 31, 2006 and 21% at September 30, 2006. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 5.7 years at September 30, 2007 compared to 4.3 years at December 31, 2006 and 4.1 years at September 30, 2006. The weighted-average yield of the debt securities in the available-for-sale portfolio was 5.51% at September 30, 2007 compared to 5.18% at December 31, 2006 and 4.66% at September 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 September 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	$	—	$	—	—	—	%
Average life 1 – 5 years		—		—	—	—
Average life 5 – 10 years		—		—	—	—
Average life greater than 10 years		3		3	12.7	6.45

Total		3		3	12.3	6.48
U.S. Government sponsored agencies:
Average life of one year or less		340		340	0.1	4.10
Average life 1 – 5 years		160		157	3.3	4.44
Average life 5 – 10 years		—		—	—	—
Average life greater than 10 years		—		—	—	—

Total		500		497	1.1	4.21
Obligations of states and political subdivisions (a):
Average life of one year or less		96		96	0.5	7.64
Average life 1 – 5 years		339		344	2.8	7.15	(b)
Average life 5 – 10 years		67		69	6.5	7.22	(b)
Average life greater than 10 years		36		36	11.0	3.92	(b)

Total		538		545	3.4	7.25
Agency mortgage-backed securities:
Average life of one year or less		152		152	0.1	5.78
Average life 1 – 5 years		1,708		1,682	3.5	4.89
Average life 5 – 10 years		6,334		6,137	7.3	5.65
Average life greater than 10 years		96		90	10.3	4.87

Total		8,290		8,061	6.4	5.48
Other bonds, notes and debentures (c):
Average life of one year or less		550		550	0.1	5.46
Average life 1 – 5 years		85		84	3.3	4.63
Average life 5 – 10 years		31		31	5.2	5.63
Average life greater than 10 years		39		38	29.3	6.74

Total		705		703	2.2	5.44
Other securities (d)		971		968

Total available-for-sale and other securities	$	11,007	$	10,777	5.7	5.51	%

(a)

Taxable-equivalent yield adjustments included in above table are 2.51%, 2.35%, 2.38%, 1.29% and 2.38% 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 commercial paper, non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.

(d)

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


	September 30, 2007			December 31, 2006		September 30, 2006
($ in millions)	Balance		% of Total	Balance	% of Total	Balance	% of Total
Demand	$	13,174	19	14,331	21	13,883	20
Interest checking		14,294	21	15,993	23	15,855	23
Savings		15,599	22	13,181	19	12,392	18
Money market		6,163	9	6,584	9	6,462	10
Foreign office		2,014	3	1,353	2	846	1

Transaction deposits		51,244	74	51,442	74	49,438	72
Other time		10,267	15	10,987	16	10,818	16

Core deposits		61,511	89	62,429	90	60,256	88
Certificates—$100,000 and over		5,973	8	6,628	9	6,871	10
Other foreign office		1,898	3	323	1	1,516	2

Total deposits	$	69,382	100	69,380	100	68,643	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 offerings and providing competitive rates. During the first quarter of 2007, the Bancorp expanded its deposit product line by offering an equity-linked certificate of deposit and a new savings account to help customers identify and reach savings goals. At September 30, 2007, core deposits represented 59% of the Bancorp’s asset funding base, compared to 57% at September 30, 2006.

During the third quarter of 2007, the Bancorp reclassified certain foreign office deposits as transaction deposits. 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. 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.

Overall, transaction and core deposit balances increased four percent and two percent, respectively, compared to September 30, 2006. Account balances continued to migrate from demand and interest checking accounts to savings. While the Bancorp continues to realize a mix shift as customers move from lower-yield transaction accounts to higher-yield savings and money market deposits, the pace of the shift decreased slightly compared to the prior year. Growth in foreign office deposits also contributed to the overall increase in core deposits.

The table below summarizes the average deposits by major category for the three months ended:

TABLE 21: Average Deposits


	September 30, 2007			December 31, 2006		September 30, 2006
($ in millions)	Balance		% of Total	Balance	% of Total	Balance	% of Total
Demand	$	13,143	19	13,882	20	13,642	20
Interest checking		14,334	20	15,744	23	16,251	23
Savings		15,390	22	12,812	18	12,279	18
Money market		6,247	9	6,572	9	6,371	9
Foreign office		1,808	3	1,047	2	770	1

Transaction deposits		50,922	73	50,057	72	49,313	71
Other time		10,290	15	10,991	16	10,794	16

Core deposits		61,212	88	61,048	88	60,107	87
Certificates—$100,000 and over		6,062	9	6,750	10	6,415	9
Other foreign office		1,981	3	1,711	2	2,898	4

Total deposits	$	69,255	100	69,509	100	69,420	100

Average core deposits increased two percent compared to the third quarter of 2006 as increases in savings and foreign office deposits were offset by declines in interest checking, certificates of deposit and commercial demand deposits. Average core deposits increased in the majority of affiliates, including increases in the Nashville, Louisville and Lexington affiliates by 23%, 11% and 10%, respectively, compared to the third quarter of 2006.

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

Borrowings

Total short-term borrowings were $8.9 billion at September 30, 2007 compared to $4.2 billion at December 31, 2006 and $9.3 billion at September 30, 2006. As of September 30, 2007, December 31, 2006 and September 30, 2006, total borrowings as a percentage of interest-bearing liabilities were 28%, 23% and 30%, respectively. The overall decrease in borrowings from the third quarter of 2006 is due to the balance sheet actions in the fourth quarter of 2006 offset by increases in federal funds purchased and other short-term borrowings during 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 and August 2007, Fifth Third Capital Trust IV and V, wholly-owned non-consolidated subsidiaries of the Bancorp, issued $750 and $575 million, respectively, 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 8 of the Notes to Condensed Consolidated Financial Statements for further discussion. In October 2007, Fifth Third Capital Trust VI, a wholly-owned non-consolidated subsidiary of the Bancorp, issued $863 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 19 of the Notes to Condensed Consolidated Financial Statements for further discussion.

TABLE 22: Borrowings


($ in millions)	September 30, 2007		December 31, 2006	September 30, 2006
Federal funds purchased	$	5,130	1,421	5,434
Other short-term borrowings		3,796	2,796	3,833
Long-term debt		12,498	12,558	14,170

Total borrowings	$	21,424	16,775	23,437

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 and reports directly to the Risk and Compliance Committee of the Board of Directors;

•

Consumer Credit Risk Management - responsible for credit risk management in consumer lending;

•

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. 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 five 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 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 centralized, while ERM manages the policy and authority delegation process directly. 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, various analytical tools and delinquency monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer loan portfolios.

Commercial Portfolio

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 September 30 ($ in millions)	Outstanding			Exposure	Nonaccrual	Outstanding	Exposure	Nonaccrual
By industry:
Real estate	$	11,003		13,708	97	10,312	12,770	46
Manufacturing		5,856		12,546	25	4,927	10,892	51
Construction		5,293		8,631	133	5,496	8,987	41
Retail trade		3,982		7,170	23	3,476	6,269	23
Transportation and warehousing		2,368		2,888	18	2,031	2,373	5
Healthcare		2,113		3,725	13	1,766	2,965	6
Business services		2,048		3,947	22	1,859	3,495	12
Wholesale trade		2,048		3,888	32	1,962	3,789	11
Financial services and insurance		1,695		5,915	6	1,556	4,520	4
Individuals		1,163		1,505	15	1,483	1,953	15
Other services		1,015		1,452	14	968	1,340	10
Accommodation and food		919		1,357	14	869	1,279	10
Communication and information		760		1,360	1	622	1,115	—
Public administration		751		965	—	800	990	—
Other		632		1,572	6	759	1,300	4
Agribusiness		622		816	—	622	816	8
Entertainment and recreation		590		857	5	568	852	—
Mining		478		858	5	264	590	1
Utilities		332		1,141	2	320	1,221	—

Total	$	43,668		74,301	431	40,660	67,516	247

By loan size:
Less than $200,000		4	%	3	11	5	3	13
$200,000 to $1 million		15		11	27	17	13	26
$1 million to $5 million		29		24	41	32	27	42
$5 million to $10 million		16		15	16	17	16	19
$10 million to $25 million		22		24	5	20	24	—
Greater than $25 million		14		23	—	9	17	—

Total		100	%	100	100	100	100	100

By state:
Ohio		25	%	29	26	25	28	37
Michigan		21		19	34	22	20	20
Illinois		10		10	11	10	10	6
Florida		10		8	9	10	9	8
Indiana		9		8	11	9	9	19
Kentucky		6		6	4	6	6	6
Tennessee		3		3	2	3	3	2
Pennsylvania		2		2	—	1	2	—
Missouri		1		1	—	1	1	—
West Virginia		—		—	1	—	—	—
Out-of-footprint		13		14	2	13	12	2

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 86% of 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 93% of outstanding balances and 90% of exposures concentrated within these ten states. The mortgage and construction segments of the commercial portfolio are characterized by 97% of outstanding balances and exposures concentrated within these ten states.

Residential Mortgage Portfolio

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.

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 24 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 September 30, 2007 and 2006. Table 25 shows the Bancorp’s originations of these products for the three months ended September 30, 2007 and 2006. The Bancorp does not currently originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest.

TABLE 24: Residential Mortgage Outstandings


	2007						2006
As of September 30 ($ in millions)	Amount		Percent of total		Delinquency Ratio		Amount		Percent of total		Delinquency Ratio
Greater than 80% LTV with no mortgage insurance	$	1,855	21	%	6.89	%	$	1,949	22	%	3.56	%
Interest-only		1,567	18		1.44			1,216	14		.08
Greater than 80% LTV and interest-only		514	6		3.68			561	6		.38
80/20 loans		—	—		—			37	—		—

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 September 30, 2007 and 2006 were $1.6 billion and 2.36% and $1.1 billion and 1.66%, respectively.

TABLE 25: Residential Mortgage Originations


	2007				2006
($ in millions)	Amount		Percent of total		Amount		Percent of total
For the three months ended September 30:
Greater than 80% LTV with no mortgage insurance	$	45	2	%	$	153	7	%
Interest-only		438	16			310	14
Greater than 80% LTV and interest-only		—	—			19	1
80/20 loans		66	2			133	6

For the nine months ended September 30:
Greater than 80% LTV with no mortgage insurance		243	3			545	8
Interest-only		1,496	17			924	13
Greater than 80% LTV and interest-only		19	—			172	2
80/20 loans		177	2			349	5
80/20 loans and interest-only		44	1			—	—

The Bancorp originates certain non-conforming residential mortgage loans known as Alt-A. Borrower qualifications are comparable to other conforming residential mortgage products and the Bancorp has sold the majority of these loans into the secondary market without recourse. For the three and nine months ended September 30, 2007, the Bancorp originated $71 million and $644 million of Alt-A loans. During 2007, approximately $150 million of Alt-A loans were moved from held for sale to held for investment, and an impairment charge of approximately $3 million was recognized in mortgage banking net revenue. As of September 30, 2007, the Bancorp held $163 million of Alt-A loans for investment with approximately $2 million on nonaccrual status. As market conditions for these loans changed throughout 2007, management responded by making adjustments to underwriting standards and, as of September 30, 2007, all Alt-A loans are being underwritten and sold under an agency flow sale agreement.

Analysis of Nonperforming Assets

A summary of nonperforming assets is included in Table 26. 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

Quantitative and Qualitative Disclosure about Market Risk (continued)

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. At least quarterly, commercial loans on nonaccrual status are reviewed for impairment and, if present, an allowance is recorded 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. 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 September 30, 2007, nonaccrual credits as a percent of total loans and leases were .75%, compared to .43% as of September 30, 2006. As of September 30, 2007, 74% of total nonaccrual credits were secured by real estate compared to 57% as of September 30, 2006.

TABLE 26: Summary of Nonperforming Assets and Delinquent Loans


($ in millions)	September 30, 2007			December 31, 2006	September 30, 2006
Commercial loans	$	175		127	157
Commercial mortgage		146		84	49
Commercial construction		105		54	31
Commercial leases		5		6	11
Residential mortgage		68		38	34
Consumer loans and leases (a)		48		43	38
Consumer restructured loans		22		—	—

Total nonaccrual loans and leases		569		352	320
Other assets, including other real estate owned		137		103	91

Total nonperforming assets	$	706		455	411

Commercial loans	$	45		38	33
Commercial mortgage		41		17	19
Commercial construction loans		54		6	10
Commercial leases		3		2	3
Residential mortgage (b)		116		68	65
Credit card		24		16	13
Consumer loans and leases (a)		77		63	53

Total 90 days past due loans and leases	$	360		210	196

Nonperforming assets as a percent of total loans, leases and other assets, including other real estate owned		.92	%	.61	.56
Allowance for loan and lease losses as a percent of total nonperforming assets		117		170	185

(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 September 30, 2007, December 31, 2006 and September 30, 2006, these advances were $19 million, $14 million and $11 million, respectively.

Commercial nonaccrual credits as a percent of commercial loans increased since the third quarter of 2006, from .61% to 1.00%. The majority of the increase continues to be driven by the real estate and construction industries in the Southern Florida, Northeastern Ohio and Eastern Michigan affiliates. As shown in Table 23, the real estate and construction industries contributed to more than two-thirds of the increase in nonaccrual credits. As of September 30, 2007, the Bancorp has outstanding loans to homebuilders of $1.4 billion, exposure of $2.4 billion and $49 million of nonaccrual credits.

Consumer nonaccrual credits as a percent of consumer loans increased since the third quarter of 2006, from .22% to .41%. The increase in consumer nonaccrual credits is primarily attributable to the housing markets in the Michigan and Florida affiliates, the changes in policy for the repossession of automobiles and the restructuring of certain high risk loans. Michigan and Florida nonaccrual credits contributed to 57% of the increase in nonaccrual credits in the consumer loan portfolio. The Bancorp has devoted significant attention to loss mitigation activities and, during the past year, decreased the timing between delinquency and repossession of automobiles and proactively restructured certain real estate loans with borrowers located in high-risk areas. These changes contributed approximately $30 million in additional nonaccrual loans as of September 30, 2007.

Total nonperforming assets were $706 million at September 30, 2007, compared to $455 million at December 31, 2006 and $411 million at September 30, 2006. Nonperforming assets as percentage of total loans, leases and other assets, including other real estate owned increased to .92% as of September 30, 2007 compared to .61% as of December 31, 2006 and .56% as of September 30, 2006. Total loans and leases 90 days past due have increased from $196 million as of September 30, 2006 to $360 million as of

Quantitative and Qualitative Disclosure about Market Risk (continued)

September 30, 2007, with the majority of the increase in the real estate and construction industries in the Michigan and Florida affiliates.

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 27: Summary of Credit Loss Experience


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2007			2006		2007		2006
Losses charged off:
Commercial loans	$	(24	)	(29	)	(71	)	(95	)
Commercial mortgage loans		(8	)	(8	)	(30	)	(16	)
Commercial construction loans		(5	)	(1	)	(17	)	(4	)
Commercial leases		—		—		(1	)	(3	)
Residential mortgage loans		(9	)	(5	)	(25	)	(16	)
Home equity		(29	)	(16	)	(70	)	(49	)
Automobile loans		(32	)	(21	)	(80	)	(62	)
Credit card		(14	)	(9	)	(37	)	(25	)
Other consumer loans and leases		(6	)	(7	)	(20	)	(21	)

Total losses		(127	)	(96	)	(351	)	(291	)
Recoveries of losses previously charged off:
Commercial loans		1		4		10		16
Commercial mortgage loans		—		1		1		2
Commercial construction loans		—		—		—		—
Commercial leases		—		1		1		5
Residential mortgage loans		—		—		—		—
Home equity		2		2		6		8
Automobile loans		7		6		25		24
Credit card		1		1		6		4
Other consumer loans and leases		1		2		14		13

Total recoveries		12		17		63		72
Net losses charged off:
Commercial loans		(23	)	(25	)	(61	)	(79	)
Commercial mortgage loans		(8	)	(7	)	(29	)	(14	)
Commercial construction loans		(5	)	(1	)	(17	)	(4	)
Commercial leases		—		1		—		2
Residential mortgage loans		(9	)	(5	)	(25	)	(16	)
Home equity		(27	)	(14	)	(64	)	(41	)
Automobile loans		(25	)	(15	)	(55	)	(38	)
Credit card		(13	)	(8	)	(31	)	(21	)
Other consumer loans and leases		(5	)	(5	)	(6	)	(8	)

Total net losses charged off	$	(115	)	(79	)	(288	)	(219	)

Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans		.41	%	.47		.38		.52
Commercial mortgage loans		.26		.30		.36		.19
Commercial construction loans		.35		.07		.40		.08
Commercial leases		(.01	)	(.12	)	.01		(.07	)

Total commercial loans		.33		.32		.35		.32

Residential mortgage loans		.41		.27		.39		.25
Home equity		.94		.46		.72		.46
Automobile loans		.91		.63		.70		.54
Credit card		3.59		3.82		3.40		3.49
Other consumer loans and leases		1.99		1.09		.49		.78

Total consumer loans		.93		.57		.72		.52

Total net losses charged off		.60	%	.43		.51		.41

Net charge-offs as a percent of average loans and leases outstanding were 60 bp in the third quarter of 2007, an increase from 52 bp and 43 bp for the quarter ended December 31, 2006 and September 30, 2006, respectively. Commercial charge-offs were modestly higher than the prior year as the increase in commercial real estate charge-offs was offset by lower commercial loan charge-offs.

Quantitative and Qualitative Disclosure about Market Risk (continued)

Compared to the prior year, consumer charge-offs increased 36 bp and 20 bp for the three and nine months ended September 30, 2007, primarily due to the home equity and automobile portfolios. Home equity charge-offs increased due to the depressed housing markets in Michigan and Florida. Automobile charge-offs increased as a result of increased loss severity due to a market surplus of used automobiles.

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.

In the current year, the Bancorp has not substantively changed any material aspect of 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 28: Changes in Allowance for Credit Losses


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2007			2006		2007		2006
Allowance for loan and lease losses:
Beginning balance	$	803		753		771		744
Net losses charged off		(115	)	(79	)	(288	)	(219	)
Provision for loan and lease losses		139		87		344		236

Ending balance	$	827		761		827		761

Reserve for unfunded commitments:
Beginning balance	$	77		74		76		70
Provision for unfunded commitments		2		2		3		6

Ending balance	$	79		76		79		76

The allowance for loan and lease losses as a percent of the total loan and lease portfolio increased to 1.08% at September 30, 2007 from 1.04% at December 31, 2006 and September 30, 2006.

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.

Quantitative and Qualitative Disclosure about Market Risk (continued)

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.

The following table shows the Bancorp’s estimated earnings sensitivity profile and the ALCO policy limits on the asset and liability positions as of September 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	(.02	)%	2.96	(5.00	)	(7.00	)
+100	.09		1.57	—		—
-100	.64		.79	—		—
-200	1.52		.03	(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 September 30, 2007:

TABLE 30: Estimated EVE Sensitivity Profile


Change in Interest Rates (bp)	Change in EVE		ALCO Policy Limits
+200	(5.53	)%	(20.0	)
-200	3.02		(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 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.

Quantitative and Qualitative Disclosure about Market Risk (continued)

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 September 30, 2007 are included in Note 5 of the Notes to Condensed Consolidated Financial Statements.

Portfolio Loans and Leases and Interest Rate Risk

Although the Bancorp’s portfolio loans and leases contain both fixed and floating/adjustable rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of time the rate earned is established. The following table summarizes the expected principal cash flows of the Bancorp’s portfolio loans and leases as of September 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	$	12,410	8,816	1,423	22,649
Commercial mortgage loans		4,899	4,614	1,577	11,090
Commercial construction loans		3,876	1,311	276	5,463
Commercial leases		589	1,483	1,638	3,710

Subtotal - commercial loans		21,774	16,224	4,914	42,912

Residential mortgage loans		2,498	3,851	2,708	9,057
Home equity		2,182	4,843	4,712	11,737
Automobile loans		3,567	5,816	623	10,006
Credit card		201	1,259	—	1,460
Other consumer loans and leases		491	552	39	1,082

Subtotal - consumer loans		8,939	16,321	8,082	33,342

Total	$	30,713	32,545	12,996	76,254

Segregated by interest rate type, the following is a summary of expected principal cash flows occurring after one year as of September 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	$	2,517	7,722
Commercial mortgage loans		2,174	4,017
Commercial construction loans		322	1,265
Commercial leases		3,121	—

Subtotal - commercial loans		8,134	13,004

Residential mortgage loans		3,617	2,942
Home equity		1,656	7,899
Automobile loans		6,439	—
Credit card		275	984
Other consumer loans and leases		528	63

Subtotal - consumer loans		12,515	11,888

Total	$	20,649	24,892

Mortgage Servicing Rights and Interest Rate Risk

The net carrying amount of the MSR portfolio was $621 million and $498 million as of September 30, 2007 and 2006, respectively. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity and consults 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.

Quantitative and Qualitative Disclosure about Market Risk (continued)

The decrease in spread between current interest rates charged and the earning interest rate of the serviced mortgage portfolio resulted in temporary impairment of $9 million during the third quarter of 2007 compared to a temporary impairment charge of $3 million in the third quarter of 2006. 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 gain of $12 million and $6 million for the three months ended September 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 Condensed Consolidated Financial Statements for further discussion on servicing rights.

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 September 30, 2007 and 2006 was approximately $262 million and $266 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 5.7 years at September 30, 2007, based on current prepayment expectations. Of the $10.8 billion (fair value basis) of securities in the available-for-sale portfolio at September 30, 2007, $2.5 billion in principal and interest is expected to be received in the next 12 months, and an additional $1.5 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 and other consumer loans are also capable of being securitized, sold or transferred off-balance sheet. For the nine months ended September 30, 2007 and 2006, a total of $9.4 billion and $6.9 billion, respectively, were sold, securitized or transferred off-balance sheet.

During the third quarter of 2007, an indirect, wholly-owned special purpose subsidiary of the Bancorp established an effective shelf registration with the U.S. Securities and Exchange Commission (“SEC”) to issue up to $5.0 billion in securities backed by automobile loans originated by the Bancorp’s Ohio and Michigan subsidiary Banks. Additionally, during the third quarter the Bancorp reclassified approximately $1.0 billion in automobile loans to loans held for sale and entered into an interest rate swap with a $1.0 billion notional amount to hedge the forecasted sale and securitization of such loans in the fourth quarter. In the fourth quarter, the Bancorp increased the forecasted sale and securitization by $1.0 billion and entered into an additional $1.0 billion interest rate swap. The effect of the forecasted sale and securitization and related hedges on our financial results for the fourth quarter of 2007 will depend on future market developments and related management decisions. However, current estimates are that pretax income could be reduced by up to $20 million.

Additionally, the Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt markets and qualifies as a “well-known seasoned issuer” under SEC rules. As of September 30, 2007, $1.7 billion of debt or other securities were available for issuance from this shelf registration under the current Bancorp’s Board of Directors’ authorizations and subsequently used to issue $863 million of trust preferred securities in October 2007. See Note 19 of the Notes to Condensed Consolidated Financial Statements for further information on this issuance. 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 9.13% 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 third 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.

Quantitative and Qualitative Disclosure about Market Risk (continued)

CAPITAL MANAGEMENT

The Bancorp maintains a relatively high level of capital as a margin of safety for its depositors and shareholders. At September 30, 2007, shareholders’ equity was $9.3 billion, compared to $10.0 billion at December 31, 2006 and September 30, 2006. Average shareholders’ equity as a percentage of average assets for the third quarter of 2007 was 9.13% compared to 9.33% in the same quarter last year. Tangible equity as a percent of tangible assets was 6.83% and 7.40% at September 30, 2007 and 2006, respectively. The decline in shareholders’ equity and the tangible equity ratio are a result of the $1.1 billion in share repurchases during 2007.

During 2007, the Bancorp raised approximately $2.2 billion in Tier I-qualifying funding through three separate issuances of trust preferred securities. In March 2007, Fifth Third Capital Trust IV, a wholly-owned non-consolidated subsidiary of the Bancorp, issued $750 million of Tier I-qualifying trust preferred securities to third party investors and invested the proceeds in junior subordinated notes issued by the Bancorp. In August 2007, Fifth Third Capital Trust V, a wholly-owned non-consolidated subsidiary of the Bancorp, issued $575 million of Tier I-qualifying trust preferred securities to third party investors and invested the proceeds in junior subordinated notes issued by the Bancorp. Additionally, in October 2007, Fifth Third Capital Trust VI, a wholly owned non-consolidated subsidiary of the Bancorp, issued $863 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 8 and Note 19 of the Notes to Condensed Consolidated Financial Statements for further discussion of these issuances.

Regulatory capital ratios remain comparable with the prior year as the impact of the share repurchases and growth in risk weighted assets was offset by the March and August issuances of Tier I-qualifying trust preferred securities. In September 2007, the Bancorp entered into a material definitive agreement to repurchase all issued and outstanding shares of its Fifth Third REIT Series B Preferred Stock on December 27, 2007. The carrying value of the Series B Preferred Stock, which qualifies as Tier 1 capital, is expected to be approximately $690 million at the purchase date. The negative impact to the regulatory ratios from the repurchase of the REIT shares will be offset by the $863 million of trust preferred securities issued in October 2007.

The Bancorp completed its acquisition of R-G Crown Bank in the fourth quarter. The integration of Crown is expected to reduce tangible and regulatory capital levels by approximately 40 bp.

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.

TABLE 33: Regulatory Capital


($ in millions)	September 30, 2007			December 31, 2006	September 30, 2006
Tier I capital	$	9,201		8,625	8,810
Total risk-based capital		11,824		11,385	10,817
Risk-weighted assets		108,754		102,823	101,940
Regulatory capital ratios:
Tier I capital		8.46	%	8.39	8.64
Total risked-based capital		10.87		11.07	10.61
Tier I leverage		9.23		8.44	8.52

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 third quarter of 2007 was $.42 per share, consistent with the second quarter of 2007 quarterly dividend and an increase of five percent over the $.40 per share declared in the third 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 2007, the Bancorp repurchased the remaining 16 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

Quantitative and Qualitative Disclosure about Market Risk (continued)

expiration date. During the second and third quarter of 2007, the Bancorp repurchased approximately 8 million and 3 million shares, respectively, under this authorization. At September 30, 2007, the Bancorp had approximately 19 million shares remaining under the current Board of Directors’ authorization.

The Bancorp’s third 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
July 1, 2007 – July 31, 2007	400,818	$	38.67	395,900	21,711,518
August 1, 2007 – August 31, 2007	2,510,007	$	37.78	2,510,000	19,201,518
September 1, 2007 – September 30, 2007	1,455		—	—	19,201,518

Total	2,912,280	$	37.92	2,905,900	19,201,518

(a)

The Bancorp repurchased 4,918, 7 and 1,455 shares during July, August and September of 2007, respectively, in connection with various employee compensation plans. These purchases are not included in the calculation for average price paid per share and do not count 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.

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 September 3