Jeff Richardson - SVP and Director, IR Kevin Kabat - President and CEO Chris Marshall - CFO

Matthew O'Connor - UBS John McDonald - Banc of America Securities Michael Mayo - Deutsche Bank K.C. Ambrecht - Millennium Don Jones - Credit Suisse

Good morning. My name is Darla, and I will be your conference operator today. At this time I would like to welcome everyone to the Fifth Third Bancorp fourth quarter 2007 conference call conference call. (Operator Instructions) Mr. Richardson, you may begin your conference. Jeff Richardson - SVP and Director, IR: Hello, and thanks for joining us this morning. We'll be talking with you today about fourth quarter and 2007 - sorry, fourth quarter 2007 and full year results, as well as our outlook for 2008. As a result, this call contains certain forward-looking statements about Fifth Third Bancorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements. Fifth Third undertakes no obligation to update these statements after the date of the call. I'm joined here in the room by Kevin Kabat, our President and CEO, and Chris Marshall, our CFO. During the question-and-answer period, please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin? Kevin Kabat - President and CEO: Thanks, Jeff. Good morning, everyone, and thanks for taking the time to join us this morning. I have a few comments, and then I'll turn things over to Chris, who'll review our financial statements, our credit trends, and also our outlook for 2008. This has obviously been a difficult quarter for Fifth Third and for the industry. On most of our key operating metrics we had good results this quarter, but I'd be the first to acknowledge that was overshadowed by what happened on the credit front. Credit deteriorated fairly sharply this quarter, and we saw that reflected in growth in NPAs and losses as well as provision. As you know, we don't hold the kinds of assets that have produced the huge losses some of our peers have seen. However, one of our polices BOLI policies is invested in assets that experienced significant market declines due to widening credit spreads. Chris will talk more about that in a minute. The credit environment remains challenging, and we expect credit conditions and the performance of our portfolio to continue to deteriorate in the near term. As we've discussed with you since the middle of '06, we've been concerned about home equity lending and real estate loans in general, particularly in the Upper Midwest and Florida more recently. We've been actively working to mitigate the impact of these problems, so though it's a tough environment and we expect the near term to present further deterioration in credit metrics, Fifth Third is well positioned. Our tangible capital levels are relatively strong compared to most of our peers, most of the problematic credit areas have been with us for awhile and we've taken action to fix them, and we have a number of strategic initiatives that are positioning us well for the future. This environment should present opportunities in which to capitalize for a strong institution like Fifth Third. Before I turn it over to Chris, I'd like to take a moment to review 2007, which was a fundamentally solid year for us with improving metrics. We started the year by laying out our three-year strategic plan and promising to be as transparent as we could be about not only our strengths but our weaknesses and what we've been doing to improve on them. We hope you'd agree that we've maintained that transparency throughout the year. We've made significant investments to improve the future performance of our business, and we continue to remain focused on these things despite the current credit environment. Let me recap our operating performance for full year 2007. Full year average loan growth was 5%, and core deposit growth was 3%. Net interest income growth was 5% for the year, and non-interest income growth was 9%, excluding nonoperating items outlined in the release. Operating revenue growth was 7%. Efficiency ratio, excluding nonoperating items, was 55% versus 54% last year, with the modest increase really driven by growth in our payments business, which has about a 70% efficiency ratio. Operating leverage created in 2007 versus 2006 was $97 million. That's good progress in a tough operating environment. Now let me summarize some of the highlights. Our payments business, Fifth Third Processing Solutions, posted another year of strong double-digit growth. We processed nearly 27 billion transactions in 2007, up 33% from last year. Solid results across the board from merchant, financial institutions and card-related revenue drove the success this year. We have a strong competitive position in this business which we continue to leverage, and we expect similar mid-teens organic growth for 2008. Our credit card initiative, driven by FTPS and the retail line of business, significantly exceeded our goals in its first year. Account originations were up 82%, and balances were up 65% year-over-year, despite having sold off $150 million of higher-risk receivables this year. Our new cards per branch averaged 24 per month versus 14 in 2006, a 75% increase in productivity. There's still a lot of opportunity to further penetrate our customer base and deepen those relationships. We're very sensitive to potential erosion in the performance of the card sector and continue to measure and monitor trends. We view the customers we're adding as high quality, and still view this as a high-return business overall. In retail banking, we saw strong growth in our deposit service charges this year, and we continued to broaden and deepen our banking network. We added 15 banking centers in the fourth quarter in addition to the 31 branches Crown brought us in Florida and Georgia. For the full year, we extended our branch network by 77 banking centers, of which 66 were in the Southeast or Chicago. And corporate banking had an excellent year. Fees were up 15%, with revenue growth across the board as was evident in both the capital markets areas and in new [inaudible] management products and services that we deployed this year. And we've had tremendous success with our health care initiative, which has added $1.4 billion in loan commitments and produced $15 million in incremental fee income for us in 2007. That's despite only being in place for part of the year. We successfully closed and converted the acquisition of R-G Crown early in November, and things are going as planned there. As we noted last week, we're awaiting regulatory approval from the Federal Reserve for First Charter, and are now planning for a second quarter close. We've received all necessary approvals for the purchase of First Horizon's branches in Atlanta and expect to close that this quarter. Looking back over the year, we accomplished a lot, and I'm proud of that. The securities portfolio issues we had for several years are a thing of the past. We continue to diversify our franchise through selected acquisitions and de novos. Our activities on these fronts over the past year have had a significant effect on the population growth characteristics of our footprint, which will help accelerate our already solid organic growth. We continue to produce good loan and deposit growth, net interest income growth, and exceptional fee income growth. Our ability to execute on our strategies and our sales culture are standing us in good stead now and will continue to do so when we emerge from the current credit cycle. It was a difficult year and a noisy quarter, and it's important to highlight these significant positives so they're not lost in what's happening on the credit front. But credit is a significant issue and will be for some time. We're well aware of that and very focused on taking steps we can take to mitigate the effects of the environment. With that, I'll turn things over to Chris to talk about fourth quarter results and outlook for 2008. Chris? Chris Marshall - CFO: Thanks, Kevin, and good morning, everyone. As Kevin said, it was a very tough quarter, clearly one of the worst the industry's ever seen, and our results obviously reflect that tough environment. GAAP earnings of $0.07 per share and operating earnings of $0.49 per share were down from a strong $0.72 last quarter due to the increase in charge-offs and the large provision expense we recorded. Beyond that, our results were solid. Fees were up $27 million sequentially or 4% if you exclude this quarter's BOLI charge and the hedge losses on the auto portfolio of $22 million, which was slightly better than we were expecting. Sequential loan growth continues in the upper mid-single digits on an annualized basis, and core deposit growth in the fourth quarter was also up in that same range. Those numbers exclude the benefit of the R-G Crown transaction. Net interest income, also excluding Crown, was up about 5%, reflecting our loan and deposit growth and a slightly better margin than we were expecting a month or so ago. Now we announced last month, as did virtually all of our peers, that we experienced a rather significant level of deterioration in credit during the quarter. As a result, provision expense increased $145 million from the third quarter, reducing earnings on a linked quarter basis by $0.18. That was driven by charge-off growth of about $60 million, and then provision exceeded charge-offs by about $110 million. By comparison, last quarter we recorded provision in excess of charge-offs of $24 million. The over-provision increased our reserve-to-loan ratio from 108 at the end of the third quarter to 117 at year end. That doesn't include an additional 11 basis points reflected in the credit marks we hold against acquired loan portfolios which are primarily related to Crown. Adding those marks to the allowance would equate the coverage of about 128%. Now the quarter had more moving parts than usual, so let me recap them for you. As I said, the reported EPS were $0.07 and operating EPS were $0.49. There were three material nonoperating items recorded in the quarter. The first was $155 million after-tax or $0.29 per share estimated charge we took on the BOLI policy, and I'm going to talk a little bit more about that in just a second. The second item was the $94 million pre-tax charge, or $0.12 per share, related to the potential VISA litigation settlements. And the third item are the charges associated with the Crown acquisition, and that accounted for about a $0.01 of EPS. Now for comparison purposes, third quarter EPS were $0.61 reported or $0.71 operating, excluding the $78 million pre-tax charge related to the VISA/AMEX settlement. And then fourth quarter 2006 EPS were $0.12 reported and $0.64 on an operating basis, and the difference there reflects the charges related to the balance sheet actions we took in November 2006 which reduced pre-tax earnings by about $454 million, or about $0.52 a share. Now not adjusted for in our operating results though noteworthy were $22 million in losses this quarter on hedges we terminated and a $1 billion of auto loans that we moved to held for sale in the third quarter. But that cost us about $0.03 in the quarter. We also booked $13 million in provision expense for unfunded commitments, an increase of $11 million from the third quarter. Now we view these items as unusual, but we also view them as part of our core operations, and I assume you would as well. Now let me spend a moment or two on the most significant charges this quarter before moving onto a discussion of our credit trends. First, starting with the non-cash charge for BOLI, we wrote down one of our BOLI policies by an estimated $155 million to reflect its current estimated cash surrender value. As is common practice, we have stable value protection on our BOLI policies to protect against market volatility in the underlying investments. The stable value protection essentially protects against P&L risk, but unlike our other BOLI policies, this particular policy only has partial wrap protection, and the market value of the underlying assets are now below the level of protection afforded by the wrap. As a result, the cash surrender value of this policy will fluctuate with the market value of the underlying investments until the value once again exceeds the limit of the wrap protection. This charge is appropriate given accounting for BOLI policies, however it does not mean we surrendered the policy or that we have any current intention of surrendering the policy. As we mention in the release, we base the estimated charge on the most recent valuation information provided by our insurance carrier after year end. We'd expect to receive audited financial information in mid-February, and that's what we'll use in our 10K. Now as for VISA, it's been announced that VISA intends to fund any litigation settlements from the proceeds of their pending IPO, which we believe is currently scheduled for late in the first quarter. Now when that occurs, we'd expect to reverse the $172 million in litigation reserves we recorded. All right, let me move onto the details, starting with credit. And first I'd note that we've added some more detail to our release which we hope will assist you in understanding our trends, and those details include a table on Page 10 that breaks down non-performing loans by loan type. Then additionally in our discussions we've provided additional information about the losses and NPA growth we're experiencing in our most stressed markets, most notably Michigan and Florida. And then finally, we've outlined the impact of losses from the brokered home equity channel, which has been shut down. Okay, let me start with charge-offs. Net charge-offs were 89 basis points for the quarter, which brought us to 61 basis points for the full year which is somewhat higher than the mid-50s range we were expecting as we entered 2007. And that obviously reflects the accelerated deterioration in the real estate sector. In the fourth quarter, consumer net charge-offs were $99 million or 118 basis points versus $79 million or 93 basis points in the third quarter. The majority of that growth was housing related. We had $9 million of increases in residential mortgage and $5 million in home equity. The increase in mortgage losses was driven by the effect of lower property values on foreclosures and higher losses were concentrated in Michigan and Florida, which account for 22% of our mortgage portfolio but accounted for 58% of our fourth quarter charge-offs. We continue to see higher home equity losses, especially in the brokered home equity channel. And this is particularly the case with brokered second lien and high LTV home equity loans, although we're also seeing stress in the geographies I just mentioned in both the direct and brokered portfolios. Brokered home equity losses were $20 million or 60% of our $32 million in home equity charge-offs, and that's from just 22% of our home equity portfolio. We began shutting down the broker channel in April when we closed the HEA business, which was our weakest performer. And HEA, as you may know, was the national brokered home equity operation we picked up through a 1999 acquisition. Since then we've shut down all brokered home equity, both within and outside the footprint, however, although it's now in runoff mode, we'd expect losses in this portfolio to continue to rise throughout 2008. Now for some added context, Michigan represented 31% of our home equity charge-offs and HEA represented 30%. Now in addition to housing, the auto portfolio also had some elevated losses of about $5 million due primarily to seasonality, although we are starting to see some earlier losses - are continuing to see, I should say, some earlier losses within the 2005 and 2006 vintages, and that's a period when terms and advance rates in the industry were somewhat extended. On the commercial side, net charge-offs were $75 million or 65 basis points versus $36 million or 33 basis points in the third quarter. The $39 million increase is made up of $25 million in C&I, $7 million in commercial mortgage, and $7 million in commercial construction. Now most of the increase in C&I losses was due to a large $15 million loss on a fraud-related credit, and this fraud accounted for more than a third of the sequential increase in the total commercial charge-off ratio. We had commercial real estate losses of $27 million of which Michigan and Florida represented half, and then loans to homebuilders produced $3 million of losses, although the represent a larger ratio in NPAs, as I'm going to mention in just a second. Our provision for loan and leases was $284 million and exceeded net charge-offs by $110 million, pushing the allowance ratio to 117. I've already noted that with purchase accounting, this underestimates the amount of coverage we have for our loan portfolio by about 11 basis points. Moving on to NPAs, our NPAs total $1.1 billion or 132 basis points on loans, up 40 basis points from the last quarter, and that represents an increase of $358 million or 51%. Now of that increase, Crown contributed $68 million and troubled debt restructurings contributed $58 million or $126 million in total. Excluding those, NPA growth was 33%, approximately what we experienced last quarter, although that's still very high. Now like last quarter, we didn't sell any NPAs this quarter as pricing remained very unattractive, and obviously the absence of sales is also contributing to the very high levels of overall NPAs. Commercial NPAs of $695 million accounted for $249 million of the NPA increase, of which Crown was $57 million. All of the increases in clearly NPAs came from commercial mortgage and construction, which was primarily concentrated in Michigan and Florida. C&I NPAs were basically flat at $178 million, but commercial construction NPAs grew $151 million and commercial mortgage NPAs were up $99 million. Michigan and Florida represented 68% of the growth in commercial real estate NPAs and accounted for 60% of CRE NPAs at year end. Homebuilders and developers accounted for $113 million of total NPAs, up $64 million from the third quarter. The addition of Crown added $20 million of these NPAs. Consumer NPAs were $369 million, up $109 million, with virtually all of the growth in residential mortgage and home equity loans. Florida and Michigan represented 50% of consumer NPA growth and R-G Crown contributed $11 million of that growth in Florida. Now those two states combined accounted for 47% of our consumer NPAs. As I just mentioned, we restructured $58 million of consumer loans during the quarter, which accounted for over half of consumer NPA growth for a total of $80 million during 2007. There's no other way to say it. It was a tough quarter from a credit standpoint. Things did deteriorate a little faster than we expected, though trends were in line with what we've been seeing for the past couple of quarters. The difference in the rate of change was primarily in home equity and commercial real estate. As we sit here today, we'd expect the first quarter to show similar trends. Now, we've got a good handle on where our issues are, and we're taking steps to ensure that our underwriting is disciplined and we're making the right loans to the right borrowers, but given the nature of credit, it's going to take some time for those steps to show up in our results. Now let me turn to the balance sheet, starting with loans. Average loans and leases were up 2% from the third quarter and 6% year-over-year. Now, loans would have been up 7% from a year ago excluding the transfers of auto loans to held for sale and the effect of R-G Crown. Now we transferred a billion of auto loans to held for sale in early August and another billion in late October. Breaking things down, average commercial loans grew 5% sequentially and 8% versus the fourth quarter. C&I loans were up 7% from the third quarter and 11% compared to last year, and commercial mortgage loans were up about $450 million and commercial construction up $45 million from last quarter. Excluding Crown, construction would have been down and commercial mortgage would have been flat. Average consumer loans were flat sequentially and were up 2% year-over-year. Excluding Crown and the transfer of auto loans, consumer loans would have been up 4% from a year ago. Now those aren't big numbers but considering the amount of tightening we've done to underwriting standards, that number looks pretty good to us. Now as Kevin said earlier, retail credit card balance growth was very strong in this quarter. It was up 7% from last quarter and 60% year-over-year. All right, moving on to deposits, average core deposits were up 3% from both the third quarter and the fourth quarter last year with about a percent of that growth contributed by R-G Crown. Transaction deposits are up 4% year-over-year on solid growth in savings and in commercial sweep accounts, which are reported as foreign office core deposits. Now looking at the key deposit lines, DDA balances were up 2% from last quarter and down 4% year-over-year. Commercial DDA balances are seasonally higher in the fourth quarter, and that's what really drove our sequential increase. Interest checking balances were flat sequentially, while savings and money market balances grew from the third quarter by about 1% and 2% respectively. And finally, retail CDs were up about 7% from last quarter, with about half of that growth coming from Crown. All right, let's move on to our revenue starting with net interest income. NII was up 3% from last quarter and 6% from the same quarter last year. Now, I'd note that about 1% of the increase came from the addition of R-G Crown. Earning asset growth of 5% and core deposit growth of 3% were the main drivers, partially offset by the reversal of interest on NPAs and the effect of the trust preferreds we issued in the third and fourth quarter. The net interest margin was down 5 basis points sequentially to 329. Now, the addition of R-G Crown contributed 3 basis points of that deterioration, although that was exactly what we expected, and the remainder, also as expected, the reduction was driven primarily by the NPA interest reversals and the trust preferred impact I just mentioned. For full-year NIM was 336, which was right in line with our full year forecast. I'll talk more about the margin when we review the 2008 outlook. All right, let's move on to non-interest income. Non-interest income was $576 million, down 20% sequentially and primarily, again, due to the BOLI charge of $155 million and the $22 million loss on the hedges that I mentioned earlier. Now fourth quarter fee growth, excluding those items, was $31 million or 4%, which is pretty strong sequentially. It was a pretty strong sequential increase, and reflected great growth in corporate banking, payments processing revenue, and deposit service charges. Now year-over-year growth on the same basis, excluding the balance sheet actions we took last year, was exceptionally strong at 19%. Our payments processing business had another impressive quarter with processing fees up 6% in the third quarter and 16% from a year ago, which is exactly where we forecasted it would be. We feel particularly good about this strong quarter given the weak holiday sales data being reported by everyone else in the industry. Our merchant revenue was up 9% from last quarter and 20% from a year ago. This segment continues to put up significantly better organic growth numbers than any of our peers. Financial institutions revenue was down 1% sequentially due to seasonality in billings, but was up 7% from a year ago on higher card usage volume. And finally, card issuer interchange, which is basically debit and credit card usage by our own customers, was up 9% from the third quarter and increased 20% from a year ago due to the success of our card initiative. Moving on to deposit service charges, we had another strong quarter, up 6% from the third quarter and 30% from a year ago. Commercial service charges drove the sequential increase. They were up 10% from the third quarter and 19% year-over-year. The increase reflects lower earnings credits and better fees associated with new product and service offerings. Our consumer services charges grew 3% sequentially and were up 41% year-over-year, driven by higher customer activity. And remember that in the fourth quarter last year, we had and actually the industry in total had a fairly sizeable decline in deposit fees, and that's making our year-over-year performance look much higher than our core growth rate really is. Our corporate banking revenue was up 17% from last quarter and 29% year-over-year. The results were driven by strong growth in syndication fees, institutional sales, interest rate revenues, and international fees. And we're really seeing a payoff here on the talent we've hired over the past couple of years as well as on our efforts to broaden our middle market corporate banking capabilities. Investment and advisory revenue decreased 1% sequentially but was up 4% year-over-year, and mortgage banking revenue was $26 million for the quarter, down 1% from the third quarter and 14% from a year ago. Now gains on loan deliveries were $18 million, up $9 million from the third quarter, which is a pretty decent result but still lower than the $25 to $30 million level we were running at before the market tightened. And then the market valuation adjustment on the MSR was a negative $6 million, but that was offset by MSR hedges which, as you know, shows up in the securities line. Other non-interest income was a negative $91 million compared to a positive $93 million in the third quarter. Results here included the BOLI charge, the auto hedge loss this quarter, and then $9 million in net gains from the FDIC credit sale and the auto loan marked-to-market in the third quarter. Now last year's results included a $17 million loss on derivatives related to securities sold as part of our fourth quarter balance sheet actions. Okay, moving on to expenses, reported expense growth was 10% sequentially and 23% year-over-year. Now the sequential change is largely due to the noncash expenses accrued for the potential VISA litigation settlements. Now that was $94 million for the fourth quarter and $78 million in the third quarter. Also included in the fourth quarter was the $13 million charge in provision expense for unfunded commitments as well as $8 million in merger-related expenses. We also saw higher expense related to affordable housing credit amortization, compensation expense driven by higher fees, and then finally higher loan and lease expense. Our results from the fourth quarter last year included a $39 million charge under termination of financing as part of our balance sheet actions. Okay, moving on to capital, our capital ratios came down from the third quarter due to the closing of the Crown acquisition, which cost us about 41 basis points of tangible equity, as well as the BOLI charge, which was another 13 basis points, and then the fourth quarter VISA charge cost us about 6 basis points. TCE was 607 at the end of the quarter. Now we'd expect to see that go up to about 630 or so by the end of the first quarter. That assumes the VISA litigation accruals are reversed, and we do a securitization during the quarter which currently looks pretty doable. I'm going to talk more about that in the outlook, but our TCE target remains 6.5, and I'm confident we have a very sensible plan to get back to that level. All right, let me turn to the full year outlook now, and you can find that on Pages 12 and 13 of the earnings release. Now one macro comment here. With the exception of capital, the guidance below doesn't include the impact of any of our pending transactions, specifically First Horizon or First Charter, nor does it include any potential impact from VISA. Now first of all, starting with NII, we'd expect NII growth in the mid-single digits driven by higher core deposits and loan growth, both of which we expect to grow in the mid to high single digits. Our core deposit growth is going to be helped by the effect of a full year of Crown as well as the effect of 2007 and 2008 de novos. Crown adds about 1.5% to 2% of expected core deposit growth, and the de novos should add about 1%. Now for loan growth, we'd expect commercial growth to be driven by C&I and to be stronger than consumer growth. Consumer growth is going to be tempered by the impact of planned auto loan sales as well as a continued focus on disciplined underwriting. In terms of the NIM, net interest margin is expected to be in the 320 to 330 range. Now in the first quarter the NIM is probably going to be lower by about 5 basis points just due to the full quarter impact of the Crown acquisition as well as higher, seasonally higher, deposit levels in the fourth quarter and higher expected levels of NPAs. As we move throughout the year, we should begin to pick up some benefit due to expected loan sales and securitization activity. Turning to non-interest income, we're currently planning for high single-digit growth. We expect mid-teens growth in the payments business, and we continue to gain market share here, and we feel really good about our ability to maintain that market share growth throughout the year. The effects of market share growth could be mitigated somewhat by forecasts which call for weaker U.S. consumer spending in 2008, and that may become a reality. But we're talking on a relative basis that no matter what the overall economy does, we're going to outperform as we did in 2007. Let's see. We're looking for deposit fee and corporate banking revenue growth in the low double digits or even a little bit higher, and that's just basically carrying through the effect of our strong rising performance throughout 2007. And we'd expect continued success in new deposit account production as well as in corporate banking activities. We also expect mortgage banking revenue to rebound towards more normalized levels, though this is a business that's really somewhat difficult to forecast. We've seen a pickup in refi activity during the last 90 days or so and if that continues, we will see some benefit in our earnings. Just as a reminder, payments processing, corporate banking and consumer overdrafts all benefited from strong positive seasonality in the fourth quarter and negative seasonality in the first, and we're expecting that to be the case in the first quarter of 2008. All right, our outlook for expense growth is mid to high single digits, in line with our revenue growth. Now, given the environment, we're obviously going to very carefully monitor revenue growth and manage our expense growth accordingly, and I'd also note that our expense plan assumes a continuation of the current credit environment lasting through 2008. Now if that credit environment worsens significantly or if there's any indication that credit trends are going to extend into 2009, we're going to reexamine our expense plan and adjust it accordingly. Now let me break down our current expense growth target just a little bit for you. Crown and de novos will each add about a percent to our expected expense growth, and then FDIC deposit insurance costs, which are expected to rise to the industry, will add another percent. And then finally processing expense growth, which is driven by revenue and volumes, is expected to add about 2% to our overall growth. So expense growth would be closer to about the 4% range excluding those factors. I'd remind you that during the first quarter we experienced negative expense seasonality due to higher FICA and unemployment accruals, which will add about $20 million in first quarter '08 expenses versus the fourth quarter. Our full year credit outlook is for net charge-offs to be in the low to mid-90s basis point range. Now that's above what we posted in the fourth quarter. And as a reminder, our results in the fourth quarter included that $15 million charge, and excluding that, charge-offs would have been closer to the 81 basis point range. Our first quarter charge-offs are likely to be somewhat higher than the fourth quarter and our full year outlook. Now as we discussed earlier, we expect NPAs and delinquencies to continue to trend upwards, and we'd expect provision expense to continue to exceed charge-offs. The amount of provision is obviously going to be driven by our reserve model, and those models take a number of factors into consideration. Now levels and trends of net charge-offs and NPAs are obviously included and more important factors, but the models also consider items such as trends in collateral values, the credit scoring of our consumer portfolios, and credit grades in the commercial portfolio as well as trends in the general economic and interest rate environment. So therefore, it's much more difficult to estimate future provision requirements than it is charge-offs. Accordingly, while our general expectation would be that we'll continue to provide in excess of charge-offs, we can't offer any more specific guidance in that area. All right, the last two items are taxes and capital. We'd expect the effective tax rate to be about 30% for the full year, which is a little bit higher than we saw in 2007, and then finally, our long-term capital targets are largely unchanged. We continue to target a 6.5% TCE ratio. We'd expect to be at about 630 at the end of the first quarter and somewhere in the 6.25 to 6.5 range the rest of the year. Now we're assuming we do an auto loan sale in the first quarter, and for this part of our guidance only, we do assume we'll see a reversal of the VISA litigation charges. We're targeting a 7.5% to 8% tier-1 ratio and an 11 to 11.5% total capital ratio. Now, we're below that total capital target ratio now, but we expect to solve that very, very quickly. All right, to wrap things up, it was obviously a very difficult quarter, largely due to credit. And while we expect credit to be problematic through the near term, as a management team we're very optimistic that we'll continue to deliver strong operating performance in 2008, and that's reflected in the outlook I just went through. Now, I know many of our team mates are listening in on this call, and I'd like to thank all of you for your hard work in 2007 as well as for your efforts toward making this a better company. We've got a lot to do in 2008, and we've got a solid plan for creating value for our shareholders. So with that, I'm going to wrap up. I'd like to thank you for your attention, and I'd be happy to answer any questions you might have.

(Operator Instructions) Your first question comes from the line of Matthew O'Connor with UBS. Chris Marshall - CFO: Morning, Matt. Kevin Kabat - President and CEO: Good morning, Matt. Matthew O'Connor - UBS: Can you just give us a little more color on the timing of the charge-offs. You mentioned 1Q would probably be a little bit higher. It sounds like you're assuming a higher first half of the year and then some improvement in the back half of the year? Kevin Kabat - President and CEO: Well, we are. And unfortunately, Matt, I can't give you quarter by quarter, but we are expecting things to be a little bit higher in the first quarter, and then level off a little bit for the rest of the year. Matthew O'Connor - UBS: Okay, what specific portfolio is driving the 1Q? I thought there was some seasonality in 4Q that made it higher, just from the auto side. Chris Marshall - CFO: I'm expecting to see a little bit more in the commercial real estate and commercial mortgage area in the first quarter as well as in home equity. Matthew O'Connor - UBS: All right. And then just separately, even though your capital ratios are below some of your targeted levels, you're still above many other banks out there, and I'm just wondering what your appetite now is for opportunistic deals, if there are some out there. Chris Marshall - CFO: You know, we obviously watch what's going on in the industry, Matt, but we've got a lot on our plate. The environment is very, very tough, and I would say, you know, deals would not be our highest priority right now, but I'm going to let Kevin add to that. Kevin Kabat - President and CEO: Matt, I just want to echo that. We are very focused now on really kind of concluding some of the integrations that we've got going right now and on the continued strong operating metrics of some of the key elements that I highlighted for you in my comments. So that's where our focus is, and that's what we're really concentrating on right now. Matthew O'Connor - UBS: Okay. All right. Thank you. Kevin Kabat - President and CEO: You bet.

Your next question comes from the line of John McDonald with Banc of America Securities. John McDonald - Banc of America Securities: Chris Marshall - CFO: Good morning, John. John McDonald - Banc of America Securities: Hi, guys. Chris, could you give us a little color, just kind of contrast some of the credit quality trends, the difference between what you're seeing in commercial real estate and then what you're seeing in C&I lending? Chris Marshall - CFO: C&I actually looks pretty solid. We haven't seen, you know, a contagion, if you will, start to hit anywhere in that book, and we remain pretty confident that the book will stay solid throughout the year. And, you know, I guess we've talked over the last couple of quarters about softness in the rest of the commercial portfolio, so if that's what you mean by a comparison or a contrast. John McDonald - Banc of America Securities: Yeah, yeah. And even in the areas geographically where you're talking about weakness, on the commercial side it's really in commercial real estate? Chris Marshall - CFO: Oh, absolutely. Yeah. Kevin Kabat - President and CEO: We've seen that also, John, in terms of tracking NPAs. The C&I portfolio from a sequential basis was literally flat. So again, we see it more in the real estate sector than we do in C&I. Chris Marshall - CFO: And that's kind of embedded in your outlook, too, for the further deterioration in the first half of '08 is commercial real estate and home equity driven, I assume? Chris Marshall - CFO: Yeah. I guess in our outlook we do assume some softness in C&I. Now that's not because we've seen any softness ourselves, but we do recognize that the economy is slowing and so we're assuming that there will be some softness at some point during the year. But in terms of, you know, our own metrics, up to now C&I looks pretty solid. John McDonald - Banc of America Securities: Okay. And then on the capital, did you give a timeframe, Chris, for when you thought you'd get to your target TCE? Did you say by the first half of the year you should get there? Chris Marshall - CFO: I think the TCE is going to move around during the year because of a few transactions that we've got planned, so I don't want to give you an exact target. But we are - all I can say, John, is we're very focused on the 6.5% target, and we're committed to getting back there. John McDonald - Banc of America Securities: Okay. Okay, thank you. Chris Marshall - CFO: Sure. Kevin Kabat - President and CEO: Thank you.

Your next question come from the line of Michael Mayo with Deutsche Bank. Chris Marshall - CFO: Good morning, Mike. Michael Mayo - Deutsche Bank: Good morning. First question, the Fed cut rates 75 basis points this morning. What's the impact for you guys? Chris Marshall - CFO: Yeah, we saw that, Mike. We're largely neutral to changes in interest rates, although I would tell you that the cut is very welcome. While we hedge our income for changes in rates and that's what I mean by we're largely neutral, cutting the rates is obviously very welcome by our customers. It's something that we hope is going to pick up overall activity. We've been somewhat hampered this year by our customers sort of hesitating to go forward with things sort of in anticipation of further rate cuts, so we're hopeful - we think what the Fed did this morning was the right thing, and we're hopeful it's going to start to spur some economic activity in our customer base. Kevin Kabat - President and CEO: Mike, as Chris mentioned earlier, we had seen some of the refi activity. This we hope will only accelerate that. We would anticipate that it will and, again, that'll be beneficial, particularly in terms of the consumer side and some of the stresses that we've experienced and highlighted for you today on that book. Michael Mayo - Deutsche Bank: To the extent that some of your borrowing costs have gone up, I mean, do you look to pass on those higher borrowing costs, which means the impact of the Fed moves is somewhat muted? Chris Marshall - CFO: Our borrowing costs -- let's see, I guess I'd go back and answer it that overall, the Fed cuts are somewhat muted to us in terms of being - overall, our income is not going to be largely affected by the Fed cuts. Michael Mayo - Deutsche Bank: Okay. First Charter, what's going on with that right now, since you need to pay more stock. Do you still want to do that deal, or what are your options to get out of it, even if you wanted to? Chris Marshall - CFO: Well, we don't want to get out of it. First Charter was a very attractive strategic acquisition for us, and while we obviously are not pleased with our stock price, we'll see where that, you know, the stock is when we eventually close. In terms of where it is, we're awaiting Fed approval. We had originally hoped to have that approval in the first quarter of 2006 and that, just with the passage of time, clearly does not look like it's going to happen. And so we're hopeful that we'll get that approval sometime in the second quarter. But we still view First Charter as a very attractive acquisition. Michael Mayo - Deutsche Bank: And the FDIC insurance costs, you said, were going higher this year? Chris Marshall - CFO: Yes. Michael Mayo - Deutsche Bank: Remind me what's going on there. Chris Marshall - CFO: There's a proposal to increase insurance rates, and I'll be honest with you, I can't remember the exact timing of when that occurs and I know there's a proposal to delay it. But right now, there is a scheduled increase in deposit rates that should affect everybody, you know, all banks. Kevin Kabat - President and CEO: It's scheduled, Mike, in the second half of the year right now unless something changes. Michael Mayo - Deutsche Bank: You're already factoring that into your expense guidance for the year? Chris Marshall - CFO: Yes. Michael Mayo - Deutsche Bank: Okay, so you consider this pretty much a done deal? Chris Marshall - CFO: Well, if it - right now, it's scheduled to occur. If the proposal to extend it goes through, then we will obviously have an improvement by that amount in our expenses. Michael Mayo - Deutsche Bank: And then last question, on problem loans, you said 81 basis points core charge-offs in the fourth quarter. In your guidance, it's just kind of for the low 90s, low to mid-90s. Is that being conservative enough? Chris Marshall - CFO: Mike, we obviously feel that it's, you know, a balanced view and that, you know, I'm not sure it's conservative enough or aggressive enough. It's what we expect it to be. You know, the increase is, again, expected to be a little bit higher in the first quarter of 2006, and then we expect things to level out a little bit. Michael Mayo - Deutsche Bank: And you said on the commercial side it's really just commercial mortgage. Is it really just homebuilders or is it, you know, expanding more broadly? Chris Marshall - CFO: No, it's -- I do think it's broader. It's housing related and anything related to housing, which is pretty consistent with what we've been seeing for the last couple of quarters. In terms of homebuilders, charge-offs actually in the quarter were quite low. We do expect that to pick up a little bit as we get into the year. Michael Mayo - Deutsche Bank: All right. Thank you. Chris Marshall - CFO: Thank you, Mike.

Your next question comes from the line of K.C. Ambrecht with Millennium Chris Marshall - CFO: Good morning, K.C. K.C. Ambrecht - Millennium: Good morning. Thanks very much for taking my questions. I'm looking through the press release; I don't see it. Can you just kind of walk -- I have a couple questions. First, could you walk us through your Florida and Michigan exposures by some of the more problem, like the size of the problem, parts of the book, like the HELOCs, the LTVs and the appraisals, and what are the migration trends for those states? Chris Marshall - CFO: Let's see. Would you mind, K.C., just going back and saying that one more time? K.C. Ambrecht - Millennium: Sure. So I was looking for a little bit more detailed exposure, particularly on the Florida and Michigan, because you cite that as like 50% increase of your problems. Chris Marshall - CFO: In terms of exposure? K.C. Ambrecht - Millennium: Like, for example, could you go through your HELOC book and what are the LTVs? What's the size of the book? What are the appraisals? When were they last appraised? What's the migration trend? Chris Marshall - CFO: K.C., I'm not sure I can reel through all that on the call. We've got that data here and we can go through that, but I'm not going to be able to pull all of those numbers together instantaneously. K.C. Ambrecht - Millennium: Okay. I think that'd be a good - okay. How big is your Florida book, just in general? How many of the loans are in Florida? Kevin Kabat - President and CEO: $8.3 billion. K.C. Ambrecht - Millennium: $8.3 billion? Kevin Kabat - President and CEO: Yep. K.C. Ambrecht - Millennium: And of the amount, how much of the loans were acquired through deals in the last four years? Kevin Kabat - President and CEO: I mean, most of it. Chris Marshall - CFO: Yeah. K.C. Ambrecht - Millennium: Most of it, right, in the thrifts you bought? Kevin Kabat - President and CEO: Well, no. The Florida National -- I'm sorry, the FNB deal and the Crown deal, Crown being about a little over 2 and FNB, $4 billion maybe? K.C. Ambrecht - Millennium: Okay. Do you have a general LTV on Florida? Kevin Kabat - President and CEO: Probably because the portfolio includes everything, I don't know that an LTV would mean anything. K.C. Ambrecht - Millennium: Okay. Okay. I mean, additional exposure of that might be good to kind of get out there because, you know, just saying that Florida's melting down. Kevin Kabat - President and CEO: In the Qs, K.C., we disclose our portfolio by state, and then in the release we talk about the effect that Florida and Michigan are having on virtually all of our portfolios. K.C. Ambrecht - Millennium: Okay. What about the capital? I mean, do you expect any more buyback now, that 6.07%? Chris Marshall - CFO: No, we don't expect buybacks currently. K.C. Ambrecht - Millennium: Okay. And then any updates on First Charter? Why's it - I'm sorry if you've answered this. I've been on a few calls. Why is it taking so long to close this? Chris Marshall - CFO: We just did answer that. I don't know if it's taking long or not. It's taking longer than we had hoped, but we are awaiting Fed approval and, beyond that, there's not really a whole lot we can say. K.C. Ambrecht - Millennium: Why is the Fed being held up? Chris Marshall - CFO: I'm not sure the Fed's being held up, K.C., it's just the Fed is going through its normal process and, you know, we really can't comment on it beyond that. K.C. Ambrecht - Millennium: Okay. And then one last question on the LTVs, just going back into Florida, maybe if you could just talk about your HELOC book in general. What percent of your HELOC book was brokered? Chris Marshall - CFO: Our brokered HELOC is about 25% - 20%, 25% of the overall book. K.C. Ambrecht - Millennium: Of the overall? Chris Marshall - CFO: There's about $11 billion in the book. About 2 of it came through what you would normally considered brokered sales, and $1 billion came through the HEA business, or $1 billion - maybe $1.2 billion or $1.3 billion. So about $3 billion in total out of the $11 billion. K.C. Ambrecht - Millennium: Okay. All right. Thanks very much. Kevin Kabat - President and CEO: Thank you, K.C.

Your next question comes from the line of Don Jones with Credit Suisse. Chris Marshall - CFO: Good morning. Don Jones - Credit Suisse: Looking at your capital ratios, it looks like the total capital ratio is getting a little bit close to the well-capitalized thresholds. Do you have any contingency plans for if something happens between now and the end of the first quarter, you know, something unforeseen of course that would drop that below the 10% limit? And given that idea, it looks as though you guys are fairly filled up on tier-1 type of securities, so are there other types of things you might consider issuing? Chris Marshall - CFO: The answer to that is yes. I'm not going to go into the individual things we have planned, but we clearly don't have any plan to go below 10%. As I tried to do or point out, we expect the total capital ratio issued to be resolved very, very quickly. Don Jones - Credit Suisse: Okay. And then more broadly on the asset quality, the non-performing assets within the book, it looks as though the commercial mortgage and commercial construction was the source of major decline in the NPAs - or bump up in the nominal NPAs. I know you've already characterized this in some broad strokes. Is that mostly Michigan and Florida, and again, mostly related to the homebuilders and whatnot? Chris Marshall - CFO: Not homebuilders necessarily, but housing or real estate in general. And yes, you're correct. It's largely concentrated in Michigan and Florida. Don Jones - Credit Suisse: What would you say your outlook is? I mean, how do you anticipate dealing with that in a way that won't further impair capital or hopefully earnings? Is there a way to sell or just ride it out? What happens with something of that size that's already coming under that much pressure? Chris Marshall - CFO: Well, let's see. Our outlook takes into account the stressful feeling there and expects some further deterioration, specifically in those geographies and in those business segments. In terms of what we're going to do, you know, there's a number of things that we're doing, including aggressive workouts. We do expect some level of NPA sales. But all that's included in our outlook, and our outlook for capital does include the expectation that there will be some deterioration in credit during the year. Michael Mayo - Deutsche Bank: Okay. Okay, thank you very much. Chris Marshall - CFO: Thank you. Operator?

At this time, there are no further questions. Kevin Kabat - President and CEO: All right, let me wrap things up, and thanks for joining us for the call this morning. Again, while it was a difficult quarter, we do feel good about the developments within the operations of the company and core results. But bottom line results are disappointing given the impact of the credit trends this quarter. We've got a strong management team acting to implement sound strategies against a very tough environment, and we're continuing to focus on executing the basics that distinguish outstanding companies and drive value. On a weekly basis, I can tell you that we're scorecarding all of our affiliates and lines of business on loan and deposit growth, fee growth and efficiency, and we're performing well on these metrics. We intend to be at the head of the class in every category, and that includes credit as well. We're able to see the improvements we've made show up in core performance. The credit actions - shutting down business lines, restricting credit, raising standards - takes longer to show up in current results, but it is happening. So remember, we're a prime underwriter in every credit class, with a very strong customer base. Our geography is not cooperating on the credit side, but those geographies will stabilize. And the steps that we're taking across the company will increase the future earnings base and produce better credit results when this cycle turns, which it will. So thanks for joining us today. We appreciate your continued interest in Fifth Third.

This concludes today's Fifth Third Bancorp fourth quarter 2007 earnings conference call. You may now disconnect.