Exhibit 99.3

Item 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

Reports of Ernst & Young LLP,

Independent Registered Public Accounting Firm

Report on Consolidated Financial Statements

Audit Committee of the Board of Directors and the Stockholders of National City Corporation

We have audited the accompanying consolidated balance sheets of National City Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of National City Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National City Corporation and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, National City Corporation changed its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, in accordance with Financial Accounting Standards Board No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans and also changed its method of accounting for uncertain tax positions on January 1, 2007, in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National City Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2008 expressed an unqualified opinion thereon.

Cleveland, Ohio

February 13, 2008, except for Note 27,
as to which the date is June 20, 2008

Report on Effectiveness of Internal Control Over Financial Reporting

Audit Committee of the Board of Directors and the Stockholders of National City Corporation

We have audited National City Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). National City Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, National City Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National City Corporation as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 13, 2008 expressed an unqualified opinion thereon.

Cleveland, Ohio

February 13, 2008

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS



	December 31

(Dollars in Thousands, Except Per Share Amounts)	2007			2006

Assets
Cash and demand balances due from banks	$	3,226,493		$	3,521,153
Federal funds sold and security resale agreements		100,278			1,551,350
Securities available for sale, at fair value		8,731,257			7,508,820
Other investments		2,306,297			6,317,779
Loans held for sale or securitization:
Commercial		41,351			33,661
Commercial real estate		507,641			177,312
Residential real estate		3,741,322			9,327,783
Home equity lines of credit		—			2,888,512
Credit card		—			425,000
Student loans		159			638


Total loans held for sale or securitization		4,290,473			12,852,906
Portfolio loans:
Commercial		30,914,512			26,969,081
Commercial leases		4,437,162			4,082,940
Commercial construction		9,051,007			7,160,310
Commercial real estate		14,883,089			12,436,458
Residential real estate		30,242,757			21,881,602
Home equity lines of credit		18,079,580			14,594,782
Credit card and other unsecured lines of credit		3,914,693			3,006,789
Other consumer		4,499,181			5,360,110


Total portfolio loans		116,021,981			95,492,072
Allowance for loan losses		(1,761,728	)		(1,131,175	)


Net portfolio loans		114,260,253			94,360,897
Properties and equipment		1,707,487			1,402,150
Equipment leased to others		374,789			572,952
Other real estate owned		424,332			229,070
Mortgage servicing rights		2,525,842			2,094,387
Goodwill		5,423,907			3,815,911
Other intangible assets		355,823			183,648
Derivative assets		1,030,794			612,914
Accrued income and other assets		5,616,003			5,166,905


Total Assets	$	150,374,028		$	140,190,842


Liabilities
Deposits:
Noninterest bearing	$	17,363,648		$	17,537,278
NOW and money market		37,868,236			30,335,531
Savings		2,870,716			1,881,444
Consumer time		29,433,081			23,620,821
Other		3,110,153			4,119,756
Foreign		6,909,661			9,738,760


Total deposits		97,555,495			87,233,590
Federal funds borrowed and security repurchase agreements		5,100,185			5,283,997
Borrowed funds		2,055,063			1,648,967
Long-term debt		25,992,453			25,406,971
Junior subordinated debentures owed to unconsolidated subsidiary trusts		1,899,683			948,705
Derivative liabilities		608,131			717,830
Accrued expenses and other liabilities		3,755,190			4,369,779


Total Liabilities	$	136,966,200		$	125,609,839


Stockholders’ Equity
Preferred stock, no par value, authorized 5,000,000 shares, 70,272 shares outstanding in 2007 and 2006 (Liquidation preference of $7 million)	$	—		$	—
Common stock, par value $4 per share, 1,400,000,000 shares authorized, 633,945,720 and 632,381,603 outstanding shares at December 31, 2007 and 2006, respectively		2,535,783			2,529,527
Capital surplus		6,374,955			4,793,537
Retained earnings		4,405,526			7,328,853
Accumulated other comprehensive income (loss)		91,564			(70,914	)


Total Stockholders’ Equity		13,407,828			14,581,003


Total Liabilities and Stockholders’ Equity	$	150,374,028		$	140,190,842

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME



	For the Calendar Year

(Dollars in Thousands, Except Per Share Amounts)	2007			2006			2005

Interest Income
Loans	$	8,570,273		$	8,351,493		$	7,239,110
Securities:
Taxable		396,378			385,807			342,797
Exempt from Federal income taxes		19,899			25,461			30,509
Dividends		2,646			2,906			8,857
Federal funds sold and security resale agreements		63,842			34,847			12,266
Other investments		132,057			133,248			98,280


Total interest income		9,185,095			8,933,762			7,731,819
Interest Expense
Deposits		2,990,671			2,420,316			1,604,601
Federal funds borrowed and security repurchase agreements		272,504			284,505			209,893
Borrowed funds		108,662			102,893			67,896
Long-term debt and capital securities		1,417,525			1,522,445			1,153,681


Total interest expense		4,789,362			4,330,159			3,036,071


Net Interest Income		4,395,733			4,603,603			4,695,748
Provision for Loan Losses		1,325,903			488,208			300,531


Net interest income after provision for loan losses		3,069,830			4,115,395			4,395,217
Noninterest Income
Deposit service charges		904,813			818,301			740,280
Loan sale (loss) revenue		(38,353	)		765,513			808,356
Loan servicing revenue		401,732			91,467			399,379
Trust and investment management fees		317,984			300,747			296,012
Brokerage revenue		188,672			157,823			159,433
Leasing revenue		177,974			228,149			267,315
Other service fees		142,832			138,147			129,497
Insurance revenue		133,617			129,341			102,789
Card-related fees		125,024			109,768			105,222
Gain on divestitures		16,493			983,940			16,001
Securities gains (losses), net		21,816			(483	)		27,087
Other		213,557			296,252			252,948


Total noninterest income		2,606,161			4,018,965			3,304,319
Noninterest Expense
Salaries, benefits, and other personnel		2,580,226			2,603,554			2,560,250
Impairment, fraud, and other losses		614,161			51,095			90,887
Third-party services		357,245			352,343			332,391
Equipment		335,344			326,058			303,471
Net occupancy		315,037			297,949			315,647
Marketing and public relations		156,922			147,679			164,533
Leasing expense		119,244			165,067			178,969
Other		827,135			767,979			787,972


Total noninterest expense		5,305,314			4,711,724			4,734,120


Income before income tax expense		370,677			3,422,636			2,965,416
Income tax expense		56,702			1,122,800			980,187


Net Income	$	313,975		$	2,299,836		$	1,985,229


Net Income Per Common Share
Basic	$	.51		$	3.77		$	3.13
Diluted		.51			3.72			3.09
Average Common Shares Outstanding
Basic		606,388,766			609,316,070			633,431,660
Diluted		612,236,659			617,671,507			641,600,969
Dividends declared per common share	$	1.60		$	1.52		$	1.44

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY



												Accumulated
												Other
	Preferred		Common			Capital			Retained			Comprehensive
(Dollars in Thousands, Except Per Share Amounts)	Stock		Stock			Surplus			Earnings			Income (Loss)			Total


Balance, December 31, 2004	$	—	$	2,586,999		$	3,647,711		$	6,468,231		$	100,588		$	12,803,529
Comprehensive income:
Net income										1,985,229						1,985,229
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities, net of reclassification adjustment for net gains included in net income													(111,211	)		(111,211	)
Change in unrealized gains and losses on derivative instruments used in cash flow hedging relationships, net of reclassification adjustment for net losses included in net income													22,488			22,488

Total comprehensive income																1,896,506
Common dividends declared, $1.44 per share										(922,377	)					(922,377	)
Preferred dividends declared, $23.00 per share										(1,616	)					(1,616	)
Issuance of 5,283,451 common shares under stock option plans				21,337			142,194									163,531
Issuance of 6,444,223 common shares pursuant to exercise of PRIDES forward contracts				25,777			139,224									165,001
Repurchase of 43,480,400 common shares				(173,922	)		(247,526	)		(1,070,255	)					(1,491,703	)


Balance, December 31, 2005	$	—	$	2,460,191		$	3,681,603		$	6,459,212		$	11,865		$	12,612,871
Comprehensive income:
Net income										2,299,836						2,299,836
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities, net of reclassification adjustment for net gains included in net income													7,956			7,956
Change in unrealized gains and losses on derivative instruments used in cash flow hedging relationships, net of reclassification adjustment for net gains included in net income													(19,388	)		(19,388	)

Total comprehensive income																2,288,404
Cumulative effect of change in accounting for mortgage servicing assets										16,886						16,886
Cumulative effect of change in accounting for pension and other postretirement obligations													(71,347	)		(71,347	)
Common dividends declared, $1.52 per share										(931,828	)					(931,828	)
Preferred dividends declared, $24.26 per share										(1,704	)					(1,704	)
Issuance of 7,985,388 common shares under stock-based compensation plans				32,115			253,645									285,760
Issuance of 29,456,622 common shares pursuant to acquisitions⁽¹⁾				117,826			976,850									1,094,676
Repurchase of 20,151,100 common shares				(80,605	)		(118,561	)		(514,740	)					(713,906	)
Other										1,191						1,191


Balance, December 31, 2006	$	—	$	2,529,527		$	4,793,537		$	7,328,853		$	(70,914	)	$	14,581,003
Comprehensive income:
Net income										313,975						313,975
Other comprehensive income, net of tax:
Change in unrealized gains and losses on securities, net of reclassification adjustment for net gains included in net income													10,596			10,596
Change in unrealized gains and losses on derivative instruments used in cash flow hedging relationships, net of reclassification adjustment for net gains included in net income													73,396			73,396
Change in accumulated unrealized losses for pension and other postretirement obligations													78,486			78,486

Total comprehensive income																476,453
Cumulative effect of change in accounting for uncertainty in income taxes										(24,122	)					(24,122	)
Common dividends declared, $1.60 per share										(983,170	)					(983,170	)
Preferred dividends declared, $25.54 per share										(1,794	)					(1,794	)
Issuance of 7,336,512 common shares under stock-based compensation plans				29,757			226,061									255,818
Issuance of 80,291,037 common shares pursuant to acquisitions⁽¹⁾				321,165			2,015,188									2,336,353
Repurchase of 86,166,638 common shares				(344,666	)		(659,831	)		(2,228,216	)					(3,232,713	)


Balance, December 31, 2007	$	—	$	2,535,783		$	6,374,955		$	4,405,526		$	91,564		$	13,407,828


(1)	Includes fair value of stock options exchanged and other equity instruments issued, if applicable.

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Calendar Year

(In Thousands)	2007			2006			2005


Operating Activities
Net income	$	313,975		$	2,299,836		$	1,985,229
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,325,903			488,208			300,531
Depreciation and amortization of properties and equipment		361,586			398,193			426,011
(Accretion) amortization on securities, loans, deposits, and debt obligations		(33,394	)		167,509			(65,294	)
MSR fair value changes		284,613			405,754			432,108
Amortization of intangible assets and other servicing assets		131,210			95,211			99,012
Derivative losses (gains), net		37,274			(266,414	)		(317,058	)
Gain on divestitures		(16,493	)		(983,940	)		(16,001	)
Gains on loans sold or securitized, net		(137,059	)		(623,431	)		(602,286	)
Other losses (gains), net		313,628			(14,301	)		88,692
Impairment and indemnification charges		552,270			24,671			41,537
Originations and purchases of loans held for sale or securitization		(51,669,117	)		(70,524,228	)		(74,928,227	)
Principal payments on and proceeds from sales of loans held for sale or securitization		49,215,468			65,478,627			75,808,753
Net change in trading assets and liabilities		(376,780	)		306,987			(515,643	)
(Benefit) provision for deferred income taxes		(405,403	)		39,752			348,411
Other operating activities, net		(636,488	)		(10,325	)		1,039,095


Net cash (used in) provided by operating activities		(738,807	)		(2,717,891	)		4,124,870


Lending and Investing Activities
Net decrease (increase) in federal funds sold, security resale agreements, and other investments		6,101,857			(1,488,655	)		(263,945	)
Purchases of available-for-sale securities		(1,907,252	)		(1,870,931	)		(2,738,209	)
Proceeds from sales of available-for-sale securities		1,821,099			1,346,372			1,693,294
Proceeds from maturities, calls, and prepayments of available-for-sale securities		1,193,250			1,440,652			1,817,125
Net (increase) decrease in portfolio loans		(4,624,299	)		969,634			(10,850,628	)
Proceeds from sales of loans		2,774,378			9,919,904			3,158,574
Proceeds from securitizations of loans		425,000			648,236			2,730,822
Net increase in properties and equipment		(220,552	)		(304,506	)		(189,505	)
Net cash (paid) received for acquisitions		(248,677	)		156,561			(322,273	)
Net cash (transferred) received for divestitures		(125,942	)		(74,214	)		24,241


Net cash provided by (used in) lending and investing activities		5,188,862			10,743,053			(4,940,504	)


Deposit and Financing Activities
Net (decrease) increase in deposits		(275,634	)		429,842			(1,663,242	)
Net (decrease) increase in federal funds borrowed and security repurchase agreements		(647,188	)		(1,237,235	)		606,826
Net increase (decrease) in borrowed funds		371,405			(769,191	)		1,457,883
Repayments of long-term debt		(8,500,087	)		(13,421,953	)		(9,736,627	)
Proceeds from issuances of long-term debt		8,327,070			8,188,570			12,159,635
Dividends paid		(984,964	)		(933,532	)		(923,993	)
Issuances of common stock		180,018			224,470			282,480
Repurchases of common stock		(3,232,713	)		(713,906	)		(1,491,703	)
Excess tax benefit for share based payments		17,378			21,261			—


Net cash (used in) provided by deposit and financing activities		(4,744,715	)		(8,211,674	)		691,259


Net decrease in cash and demand balances due from banks		(294,660	)		(186,512	)		(124,375	)
Cash and demand balances due from banks, January 1		3,521,153			3,707,665			3,832,040


Cash and Demand Balances Due from Banks, December 31	$	3,226,493		$	3,521,153		$	3,707,665


Supplemental Information
Cash paid for:
Interest	$	4,839,526		$	4,289,917		$	3,004,305
Income taxes		834,397			658,961			835,635
Noncash items:
Transfers of portfolio loans and property to other real estate		758,189			468,645			204,203
Transfers of portfolio loans to held for sale		609,840			10,578,105			3,650,826
Transfers of held for sale loans to portfolio		8,796,693			64,237			314,699
Common shares and stock options issued for acquisitions		2,336,353			1,088,031			(10,842	)
Investment received upon sale of First Franklin		—			4,474,810			—
Carrying value of securities donated to the National City Foundation		—			—			24,179

Notes to Consolidated Financial Statements

Nature of Operations

National City Corporation (National City or the Corporation) is a financial holding company headquartered in Cleveland, Ohio. National City operates through an extensive branch bank network in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and Wisconsin, and also conducts selected lending businesses and provides other financial services on a nationwide basis. Primary businesses include commercial and retail banking, mortgage financing and servicing, consumer finance, and asset management.


1.	Basis of Presentation and Significant Accounting Policies

The accompanying Consolidated Financial Statements include the accounts of the Corporation and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation.

Consolidation: Accounting Research Bulletin 51 (ARB 51), Consolidated Financial Statements, requires a company’s consolidated financial statements include subsidiaries in which a company has a controlling financial interest. This requirement usually has been applied to subsidiaries in which a company has a majority voting interest. Investments in companies in which the Corporation controls operating and financing decisions (principally defined as owning a voting or economic interest greater than 50%) are consolidated. Investments in companies in which the Corporation has significant influence over operating and financing decisions (principally defined as owning a voting or economic interest of 20% to 50%) and limited partnership investments are generally accounted for by the equity method of accounting. These investments are principally included in other assets, and National City’s proportionate share of income or loss is included in other noninterest income.

The voting interest approach defined in ARB 51 is not applicable in identifying controlling financial interests in entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks. In such instances, Financial Accounting Standards Board Interpretation 46(R) (FIN 46R), Consolidation of Variable Interest Entities (VIE), provides guidance on when a company should include in its financial statements the assets, liabilities, and activities of another entity. In general, a VIE is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a VIE is called the primary beneficiary of that entity. The Corporation’s Consolidated Financial Statements include the assets, liabilities, and activities of VIEs for which it is deemed to be the primary beneficiary.

The Corporation uses special-purpose entities (SPEs), primarily securitization trusts, to diversify its funding sources. SPEs are not operating entities, generally have no employees, and usually have a limited life. The basic SPE structure involves the Corporation transferring assets to the SPE. The SPE funds the purchase of those assets by issuing asset-backed securities to investors. The legal documents governing the SPE describe how the cash received on the assets held in the SPE must be allocated to the investors and other parties that have rights to these cash flows. National City structures these SPEs to be bankruptcy remote, thereby insulating investors from the impact of the creditors of other entities, including the transferor of the assets.

Where the Corporation is a transferor of assets to an SPE, the assets sold to the SPE generally are no longer recorded on the balance sheet and the SPE is not consolidated when the SPE is a qualifying special-purpose entity (QSPE). Statement of Financial Accounting Standards 140 (SFAS 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, provides specific criteria for determining when an SPE meets the definition of a QSPE. In determining whether to consolidate nonqualifying SPEs where assets are legally isolated from National City’s creditors, the Corporation considers such factors as the amount of third-party equity, the retention of risks and rewards, and the extent of control available to third parties. The Corporation currently services credit card and

automobile loans that were sold to securitization trusts. Further discussion regarding these securitization trusts is included in Note 5.

Use of Estimates: The accounting and reporting policies of National City conform with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual realized amounts could differ materially from those estimates.

Statement of Cash Flows: Cash and demand balances due from banks are considered cash and cash equivalents for financial reporting purposes. Cash flows associated with loan activities are classified in the statement of cash flows based upon their balance sheet classification at the time of origination or acquisition. Loan activities associated with loans held for sale and portfolio loans are classified as operating and investing activities, respectively, in the statement of cash flows.

Business Combinations: Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Refer to Note 3 for further discussion.

Loans and Leases: Loans are classified within portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable future is a management judgment which is determined based upon the type of loan, business strategies, current market conditions, balance sheet management and liquidity needs. Management’s view of the foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from portfolio into held for sale or securitization. Loans are classified as held for sale when management has the intent and ability to sell or securitize. Due to changing market conditions or other strategic initiatives, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held for sale may be reclassified into portfolio. Loans transferred between loans held for sale and portfolio classifications are recorded at the lower of cost or market at the date of transfer.

Portfolio loans are carried at the principal amount outstanding net of unearned income, unamortized premiums or discounts, deferred loan origination fees and costs, and fair value adjustments, if any. Loans held for sale or securitization are carried at the lower of cost or fair value applied on an aggregate basis by type of loan. Fair value is measured based on purchase commitments, bids received from potential purchasers, quoted prices for the same or similar loans, or prices of recent sales or securitizations. Management considers in its assessment the probability that buyer commitments may not close. In the absence of an active market, fair value is based upon a discounted cash flow model which utilizes inputs and assumptions which are believed to be consistent with market participants’ views.

When the Corporation sells a loan or group of loans which qualify as a sale pursuant to SFAS 140, the loans are removed from the balance sheet and a gain or loss is recognized in loan sale revenue.

Interest income is recognized utilizing the interest method. Loan origination fees, fees for providing loan commitments that result in loans, certain direct origination costs, and unearned discounts are deferred and amortized into interest income utilizing the interest method to achieve a level effective yield over the term of the loan. Other credit-related fees, including letter and line of credit fees and loan syndication fees, are recognized as fee income when earned.

Leases are classified as either direct financing leases or operating leases, based on the terms of the lease arrangement. To be classified as a direct financing lease, the lease must have at least one of the following four characteristics: 1) the lease transfers ownership of the property to the lessee by the end of the lease term, 2) the lease contains a bargain purchase option, 3) the lease term is equal to 75% or more of the estimated economic life of the leased property, or 4) the present value of the minimum lease payments are at least 90% of the cost of the leased property. Leases that do not meet any of these four criteria are classified as operating leases and reported as equipment leased to others on the balance sheet.

Income on operating leases is recognized on a straight-line basis over the lease term. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment. Income on leveraged leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive.

At the inception of a lease, residual value is determined based on the estimated fair market value of the asset at the end of the original lease term. For automobile leases, fair value was based upon published industry market guides. For commercial equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. Renewal options and extensions are not considered in the original lease term due to the absence of penalties for nonrenewal.

Automobile lease residual values and certain types of commercial equipment lease residuals are guaranteed by third parties. Although these guarantees of residual value are not considered in determining the initial accounting for these leases, the guarantees can affect the future accounting for the residual values. Commercial equipment residual values not protected by a guarantee are reviewed quarterly for other-than-temporary impairment. Impairment is assessed by comparing the carrying value of the leased asset’s residual value to both current and end-of-lease term market values. Where this analysis indicates that an other-than-temporary impairment has occurred, the carrying value of the lease residual is reduced to the estimated fair value, with the write-down generally recognized in other noninterest expense in the income statement.

Commercial loans and leases and commercial loans secured by real estate are designated as nonperforming when either principal or interest payments are 90 days or more past due (unless the loan or lease is sufficiently collateralized such that full repayment of both principal and interest is expected and is in the process of collection), terms are renegotiated below market levels, or when an individual analysis of a borrower’s creditworthiness indicates a credit should be placed on nonperforming status. When a loan is placed on nonperforming status, uncollected interest accrued in prior years is charged against the allowance for loan losses, while uncollected interest accrued in the current year is reversed against interest income. Interest income is recorded on a cash basis during the period the loan is on nonperforming status after recovery of principal is reasonably assured. Nonperforming commercial loans and leases and commercial loans secured by real estate are generally charged off to the extent principal and interest due exceed the net realizable value of the collateral, with the charge-off occurring when the loss is reasonably quantifiable but not later than when the loan becomes 180 days past due.

Commercial and commercial real estate loans exceeding $5 million are evaluated for impairment in accordance with the provisions of SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires an allowance to be established as a component of the allowance for loan losses when it is probable all amounts due will not be collected pursuant to the contractual terms of the loan and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral, if the loan is collateral dependent. All loans subject to evaluation and considered impaired are included in nonperforming assets.

Loans secured by one-to-four family residential real estate, including home equity lines of credit and loans, are designated as nonperforming based upon several factors including payment delinquency, bankruptcy status, and prior principal charge-offs. When a loan is placed on nonperforming status, uncollected interest accrued in prior years is charged against the allowance for loan losses, while uncollected interest accrued in the current year is reversed against interest income. Additionally, these loan types are generally charged off to the extent principal and interest due exceed the estimated realizable value of the collateral on the date the loan becomes 180 days past due, or at the earlier of the foreclosure sale or when an appraisal indicates a value less than the loan value. Loans covered by lender-paid mortgage insurance are not charged off to the extent an insurance recovery is probable.

Consumer loans are subject to mandatory charge-off at a specified delinquency date and, except for residential real estate loans, are usually not classified as nonperforming prior to being charged off. Closed-end consumer loans, which include installment and student loans and automobile leases, are generally charged off in full no later than when the loan becomes 120 days past due. Open-end, unsecured consumer loans, such as credit card loans, are generally charged off in full no later than when the loan becomes 150 days past due.

Loans that are restructured due to a borrower experiencing financial difficulties, where the Corporation, for economic or legal reasons, grants a concession to the borrower that it would otherwise not consider, are accounted for as a troubled debt restructuring (TDR). TDRs may include certain modifications of terms of loans, receipts of assets from debtors in partial or full satisfaction of loans, or a combination of both. Restructured loans classified as TDRs are accounted for in accordance with SFAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, and SFAS 114.

The Corporation sells residential and commercial real estate loans to Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA) in the normal course of business. These loan sale programs allow the Corporation to repurchase individual delinquent loans that meet certain criteria. Without the sponsoring entity’s prior authorization, the Corporation has the option to repurchase the delinquent loan for an amount equal to 100% of the remaining principal balance of the loan. Under SFAS 140, once the Corporation has the unconditional ability to repurchase the delinquent loan, effective control over the loan has been regained. At this point, the Corporation is required to recognize the loan and a related liability on its balance sheet, regardless of the Corporation’s intent to repurchase the loan. Refer to Note 7 for loans and borrowings recognized under these programs.

Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments: The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses within the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, probable recoveries under lender paid mortgage insurance, current economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, insurance coverage limits, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is recorded based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted quarterly. When portfolio loans are identified for sale or securitization, the attributed loan loss allowance is reclassified to held for sale as a reduction to the carrying value of the loans. If a loss attributable to deterioration of the creditworthiness of the borrower is anticipated upon sale, a charge-off is recognized upon transfer.

The Corporation maintains an allowance for losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. This allowance is reported as a liability on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these losses is recorded in noninterest expense.

Other Real Estate Owned: Other real estate owned (OREO) is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations, as well as bank premises qualifying as held for sale under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. OREO obtained in satisfaction of a loan is recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the net carrying value of the loan either charged to the allowance for loan losses, or recorded in noninterest income after recovery of previously recognized charge-offs. Bank premises are transferred at the lower of carrying value or estimated fair value less anticipated selling costs. Subsequent changes in value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer, with the offset recorded in noninterest expense. Gains or losses not previously recognized resulting from the sale of OREO are recognized in noninterest expense on the date of sale.

Securities: Investments in debt securities and certain equity securities with readily determinable fair values, other than those classified as principal investments or accounted for under the equity method, are accounted for under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 requires investments to be classified within

one of three categories: trading, held to maturity, or available for sale, based on the type of security and management’s ability and intent with regard to selling the security.

Securities purchased with the intention of realizing short-term profits, or that are used to manage risk in other balance sheet assets and liabilities carried at fair value, are considered trading securities, carried at fair value, and are included in other investments on the balance sheet. Depending on the purpose for holding the securities, realized and unrealized gains and losses are included in either brokerage revenue, loan servicing revenue or other noninterest income in the statement of income. Interest on trading account securities is recorded in interest income. Loans are classified as trading when positions are bought and sold primarily to make profits on short-term appreciation or for other trading purposes. Trading loans are also included in other investments on the balance sheet and are carried at fair value, with gains and losses included in other noninterest income. See Note 9 for further information on trading securities.

Debt securities are classified as held to maturity when management has the positive intent and ability to hold the securities to maturity. Securities held to maturity, when present, are carried at amortized cost. At December 31, 2007, National City held one security as held to maturity with an amortized cost of $6 million and a fair value of approximately $6 million. National City held no securities classified as held to maturity at December 31, 2006.

Debt and marketable equity securities not classified as held to maturity or trading are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and unrealized losses not deemed other-than-temporary reported in accumulated other comprehensive income, net of tax. Realized gains and losses on the sale of, and other-than-temporary impairment charges, on available-for-sale securities are recorded in securities gains or losses in the statement of income.

Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity, are included in interest income. Realized gains and losses on the sale of securities, and other-than-temporary impairment charges, are determined using the specific-identification method. Purchases and sales of securities are recognized on a trade date basis.

Certain equity security investments that do not have readily determinable fair values and for which the Corporation does not exercise significant influence are carried at cost and classified either within other investments or other assets on the balance sheet depending on the frequency of dividend declarations. Cost method investments classified within other investments consist solely of shares of Federal Home Loan Bank and Federal Reserve Bank stock. These investments totaled $808 million and $483 million at December 31, 2007 and December 31, 2006, respectively. Cost method investments classified within other assets were less than $1 million at December 31, 2007 and December 31, 2006. The Corporation’s investment in Visa has no cost basis. Cost method investments are reviewed for impairment at least annually or sooner if events or changes in circumstances indicate the carrying value may not be recoverable.

Principal Investments: Principal investments, which include direct investments in private and public companies and indirect investments in private equity funds, are carried at estimated fair value with changes in fair value recognized in other noninterest income.

Direct investments include equity and mezzanine investments in the form of common stock, preferred stock, limited liability company interests, warrants, and subordinated debt. Direct mezzanine investments in the form of subordinated debt and preferred stock, which earn interest or dividends, are included in other investments on the balance sheet, while the remainder of the direct investments are included in other assets. Indirect investments include ownership interests in private equity funds managed by third-party general partners and are included in other assets on the balance sheet.

The fair values of publicly traded investments are determined using quoted market prices, subject to various discount factors related to sales restrictions and regulations, when appropriate. Investments that are not publicly traded are initially recorded at cost, and subsequent adjustments to fair value are estimated in good faith by management. Factors used in determining the fair value of direct investments include consideration of the company’s business model, current and projected financial performance, liquidity, management team, and overall economic and market conditions. Factors used in determining the fair value of indirect investments include evaluation of the investments owned by the private

equity funds, the general partner’s valuation techniques, and overall economic and market conditions. The fair value estimates of the investments are based upon currently available information and may not necessarily represent amounts that will ultimately be realized, which depend on future events and circumstances.

Interest and dividends on direct mezzanine debt and preferred stock investments are recorded in interest income. All other income on principal investments, including fair value adjustments, realized gains and losses on the return of capital, and principal investment write-offs, is recognized in other noninterest income.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase: Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party. The fair value of collateral either received from or provided to a third party is continually monitored, and additional collateral is obtained or requested to be returned as appropriate.

Goodwill and Other Intangible Assets: Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged, either on its own or in combination with a related contract, asset, or liability. Goodwill impairment testing is performed annually, or more frequently if events or circumstances indicate possible impairment. Goodwill is allocated to reporting units one level below business segments. Fair values of reporting units are determined using either market-based valuation multiples for comparable businesses if available, or discounted cash flow analyses based on internal financial forecasts. If the fair value of a reporting unit exceeds its net book value, goodwill is considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an impairment loss may be recognized. An impairment loss is measured as the excess of the carrying value of the goodwill of a reporting unit over its implied fair value. The implied fair value of goodwill represents the difference between the fair value of the reporting unit and the fair value of all of the assets and liabilities of that unit, including any unrecognized intangible assets. Goodwill impairment losses are recorded in other noninterest expense. Note 11 contains additional information regarding goodwill and the carrying values by major lines of business.

Intangible assets with finite lives include those associated with core deposits, credit cards, and other items. Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Core deposit intangibles are primarily amortized over a period not to exceed 10 years using an accelerated amortization method. Credit card intangibles are amortized over their estimated useful lives on a straight-line basis, which range from one to seven years. Other intangibles, primarily customer contracts and noncompete agreements, are amortized over the period benefited ranging from three to 11 years. Amortization expense for core deposits and other intangibles is recognized in noninterest expense. Note 11 includes a summary of other intangible assets.

Depreciable Assets: Properties and equipment are stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred, while improvements which extend an asset’s useful life are capitalized and depreciated over the estimated remaining life of the asset. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the asset. Useful lives range from one to 10 years for furniture, fixtures, and equipment; three to five years for software, hardware, and data handling equipment; and 10 to 40 years for buildings and building improvements. Land improvements are amortized over a period of 15 years. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured pursuant to SFAS 13, Accounting for Leases. For leasehold improvements acquired in a business combination, lease renewals reasonably assured at the date of acquisition are included in the remaining lease term. For leasehold improvements placed in service after the inception of the lease, lease renewals reasonably assured at the date of purchase are included in the remaining lease term.

Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash

flows of a long-lived asset are less than its carrying value. In that event, the Corporation recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if available, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense.

Equipment leased to others is stated at cost less accumulated depreciation. Depreciation expense is recorded on a straight-line basis over the life of the lease considering the estimated residual value. On a periodic basis, leased assets are reviewed for impairment. An impairment loss is recognized if the carrying amount of leased assets exceeds fair value and is not recoverable. The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.

Asset Securitizations: National City uses the securitization of financial assets as a source of funding. In a securitization, financial assets, including pools of credit card and automobile loans, are transferred into trusts or to SPEs in transactions which are effective under applicable banking rules and regulations to legally isolate the assets from National City Bank (the Bank), a subsidiary of the Corporation. Where the transferor is a depository institution, such as the Bank, legal isolation is accomplished through compliance with specific rules and regulations of the relevant regulatory authorities. In addition, the Corporation purchased the guaranteed portion of Small Business Administration (SBA) loans from third-party lenders and then securitized these loans into SBA guaranteed pooled securities through the use of a fiscal and transfer agent approved by the SBA. The certificates are then sold directly to institutional investors, achieving legal isolation.

SFAS 140 requires a true sale analysis of the treatment of the transfer under state law as if the Corporation was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met under SFAS 140, other factors concerning the nature and extent of the transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted, including whether the SPE has complied with rules concerning qualifying special-purpose entities.

Legal opinions regarding legal isolation have been obtained by the Bank for each of its credit card securitizations. These opinions stated in their conclusions that the Federal Deposit Insurance Corporation (FDIC) regulation, Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation (Securitization Rule) would be applicable to the transfer of such assets. The Securitization Rule provides reasonable assurance that neither the FDIC acting as conservator or receiver for the transferring bank subsidiary, nor any other creditor of the bank, may reclaim or recover the assets from the securitization trust or recharacterize the assets as property of the transferring bank subsidiary or of the conservatorship or receivership for the bank. The opinion further reasoned, even if the Securitization Rule did not apply, then pursuant to various FDIC pronouncements, the FDIC would uphold the effectiveness of the security interest granted in the financial assets.

Legal opinions were also obtained for each automobile loan securitization, which were all structured as two-step transfers. While noting each of these transactions fall within the meaning of a securitization under the Securitization Rule, in accordance with accounting guidance, an analysis was also rendered under state law as if the transferring Bank was a debtor under the bankruptcy code. The true sale opinion obtained for each of these transactions provides reasonable assurance that the purchased assets would not be characterized as the property of the transferring bank’s receivership or conservatorship estate in the event of insolvency and also states the transferor would not be required to substantively consolidate the assets and liabilities of the purchaser SPE with those of the transferor upon such event.

The process of securitizing SBA loans into pools of SBA certificates is prescribed by the SBA and must be followed to obtain the SBA guarantee. This process meets the requirements for sale treatment under SFAS 140.

In a securitization, the trust issues beneficial interests in the form of senior and subordinated asset-backed securities backed or collateralized by the assets sold to the trust. The senior classes of the asset-backed securities typically receive

investment grade credit ratings at the time of issuance. These ratings are generally achieved through the creation of lower-rated subordinated classes of asset-backed securities, as well as subordinated interests retained by an affiliate of the Corporation. In all cases, the Corporation or its affiliates may retain interests in the securitized assets, which may take the form of seller certificates, subordinated tranches, cash reserve balances or interest-only strips representing the cash flows generated by the assets in excess of the contractual cash flows required to be paid to the investors.

An SBA approved fiscal and transfer agent associated with the SBA securitizations issues certificates once all the necessary documents to support the transaction have been provided. The Corporation has retained beneficial interests in the securitized assets in the form of interest-only strips. The SBA guarantees the credit risk with respect to the loans sold.

In accordance with SFAS 140, securitized loans are removed from the balance sheet and a net gain or loss is recognized in income at the time of initial sale and each subsequent sale when the combined net sales proceeds and, if applicable, retained interests differ from the loans’ allocated carrying amount. Net gains or losses resulting from securitizations are recorded in loan sale revenue within noninterest income.

Retained interests in the subordinated tranches and interest-only strips are recorded at their fair value and included in the available-for-sale or the trading securities portfolio. Retained interests from the credit card and automobile loan securitizations are classified as available-for-sale securities. Retained interests from the SBA securitizations are classified as trading securities and are included in other investments on the balance sheet. Subsequent adjustments to the fair value of retained interests classified as available for sale are recorded through accumulated other comprehensive income within stockholders’ equity, or in security losses in the income statement if the fair value has declined below the carrying amount, and such decline has been determined to be other-than-temporary. Fair value adjustments to retained interests classified as trading securities are recorded in other noninterest income while other-than-temporary impairments are recorded within security (losses) gains, net.

The fair value of retained interests is estimated at the time of sale and at each subsequent reporting date by using a cash flow valuation model which calculates the present value of the estimated cash flows of retained interests. Assumptions and estimates used in the cash flow model consist of credit loss rates, loan prepayment rates, loan pool characteristics such as loan interest rates and expected life of the loans, the cost of funds, servicing fees and costs, and discount rates commensurate with the risks involved. On a monthly basis, management reviews the historical performance of each retained interest and the assumptions used to project future cash flows. If past performance or future expectations dictate, assumptions are revised and the present value of future retained interest cash flows is recalculated. Refer to Note 5 for further analysis of the assumptions used in the determination of fair value of retained interests. The value of these retained interests represent National City’s maximum loss exposure with respect to securitization vehicles. The investors in the asset-backed securities issued by the SPEs have no further recourse against the Corporation if cash flows generated by the securitized assets are inadequate to service the obligations of the SPEs.

For credit card securitizations, the Corporation’s continuing involvement in the securitized assets includes maintaining an undivided, pro rata interest in all credit card assets that are in the trust, referred to as seller’s interest. The seller’s interest ranks equally with the investors’ interests in the trust. As the amount of the assets in the securitized pool fluctuates due to customer payments, purchases, cash advances, and credit losses, the carrying amount of the seller’s interest will vary. However, the Corporation is required to maintain its seller’s interest at a minimum level of 5% of the initial invested amount in each series to ensure sufficient assets are available for allocation to the investors’ interests.

Also with regard to credit card securitizations, the trust is not required to make principal payments to the investors during the revolving period, which generally approximates 48 months. Instead, the trust uses principal payments received on the accounts to purchase new credit card loans. Therefore, the principal dollar amount of the investor’s interest in the assets within the trust remains unchanged. Once the revolving period ends, the trust will distribute principal payments to the investors according to the terms of the transaction. Distribution of principal to the investors in the credit card trust may begin earlier if the average annualized yield on the loans securitized (generally equal to the sum of interest income, interchange and other fees, less principal credit losses during the period) for three consecutive months drops below a minimum yield (generally equal to the sum of the coupon rate payable to investors plus contractual servicing fees), or certain other events occur.

Transaction costs associated with revolving loan securitizations are deferred at the time of sale and amortized over the revolving term of the securitization, while transaction costs associated with fixed-term securitizations are recognized as a component of the gain or loss at the time of sale.

Servicing Assets: The Corporation periodically sells or securitizes loans while retaining the obligation to perform the servicing of such loans. In addition, the Corporation may purchase or assume the right to service loans originated by others. Whenever the Corporation undertakes an obligation to service a loan, management assesses whether a servicing asset or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to exceed current market servicing prices. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Corporation for its expected cost. Servicing assets related to residential real estate loans are separately presented on the balance sheet as mortgage servicing rights (MSRs). Servicing assets associated with the sale or securitization of commercial real estate and other consumer loans are presented within other assets on the balance sheet. The Corporation does not presently have any servicing liabilities.

All separately recognized servicing assets and/or liabilities are initially recognized at fair value. For subsequent measurement of servicing rights, the Corporation has elected the fair value method for MSRs while all other servicing assets follow the amortization method. Under the fair value measurement method, MSRs are recorded at fair value each reporting period, and changes in fair value are reported in loan servicing revenue in the income statement. Under the amortization method, other servicing assets are amortized in proportion to, and over the period of, estimated servicing income and assessed for impairment based on fair value at each reporting period. Contractual servicing fees including ancillary income and late fees, as well as fair value adjustments, associated derivative gains and losses, and impairment losses, if any, are reported in loan servicing revenue in the income statement.

The fair value of MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. Expected mortgage loan prepayment assumptions are derived from an internal proprietary model and consider empirical data drawn from the historical performance of the Corporation’s managed portfolio. Prepayment rates have a lesser impact on the value of servicing assets associated with commercial real estate loans as these loans have lockout and prepayment penalties generally ranging from five to nine years.

Future interest rates are another significant factor in the valuation of MSRs. In 2007, the Corporation refined its MSR valuation model to incorporate market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. In prior periods, the MSR valuation model assumed that interest rates remained constant over the life of the servicing asset cash flows.

Derivative Instruments: The Corporation enters into derivative transactions principally to protect against the risk of adverse price or interest-rate movements on the value of certain assets and liabilities and on future cash flows. In addition, certain contracts and commitments, such as mortgage loan commitments, are defined as derivatives under GAAP.

Under the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments are carried at fair value on the balance sheet. SFAS 133 provides special hedge accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest-rate risk, are considered fair value hedges under SFAS 133. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The

Corporation formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

Fair value hedges are accounted for by recording the fair value of the derivative instrument, the fair value of the hedged risk of the hedged asset or liability, with corresponding offsets recorded in the income statement. The fair values of derivatives are recorded as freestanding assets or liabilities on the balance sheet, while fair value adjustments to the hedged assets or liabilities are included in the carrying value of the hedged items. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in accumulated other comprehensive income within stockholders’ equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been or will not continue to be highly effective as a hedge, hedge accounting is discontinued. When this occurs, SFAS 133 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases.

Share-Based Payment: Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used to estimate the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. When an award is granted to an employee who is retirement eligible, the compensation cost of these awards is recognized over the period up to the date the employee first becomes eligible to retire.

Advertising Costs: Advertising costs are generally expensed as incurred.

Income Taxes: The Corporation and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based upon income in the consolidated financial statements, rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

Positions taken in the Corporation’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Corporation provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Corporation claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the income statement.

Stock Repurchases: The Corporation periodically repurchases shares of its outstanding common stock through open market purchases or other methods. Repurchased shares are recorded as treasury shares on the trade date using the par value method, and the cash paid is allocated to common stock, capital surplus, and retained earnings. Treasury shares are available for reissuance upon exercise of employee stock awards.

2. Recent Accounting Pronouncements

Accounting for Certain Hybrid Financial Instruments: In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS 133 and SFAS 140. SFAS 155 requires entities to evaluate and identify whether interests in securitized financial assets are freestanding derivatives or hybrid financial instruments that contain an embedded derivative that may require bifurcation. SFAS 155 also permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement was effective for all financial instruments acquired or issued by the Corporation on or after January 1, 2007. The adoption of this statement did not have a material impact on financial condition, results of operations, or liquidity.

Accounting for Uncertainty in Income Taxes: In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include an annual tabular rollforward of uncertain tax positions. The provisions of this interpretation were adopted by the Corporation on January 1, 2007. Upon adoption, the Corporation increased its reserves for uncertain tax positions by $31 million which was recognized by way of a cumulative effect adjustment to retained earnings ($24 million net of tax).

Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction: In July 2006, the FASB issued FASB Staff Position (FSP) 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. This FSP amends SFAS 13, Accounting for Leases, to require a lessor in a leveraged lease transaction to recalculate the lease for the effects of a change or projected change in the timing of cash flows relating to income taxes that are generated by the transaction. The Corporation adopted FSP 13-2 on January 1, 2007, and the adoption did not have a material impact on financial condition, results of operations, or liquidity.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. On December 31, 2006, the Corporation adopted the recognition and disclosure provisions of this statement which resulted in the recording of the funded status of its pension and postretirement plans as either assets or liabilities and the recording of unrecognized actuarial gains/losses, prior service costs, and transition obligations totaling $71 million as a separate component of accumulated other comprehensive income, net of tax. SFAS 158 also required the Corporation to change the measurement date of its defined benefit pension and other postretirement obligations from October 31 to December 31. The incremental pension benefit associated with the measurement date change was recognized on January 1, 2008 as an increase to retained earnings of $1 million after-tax.

Fair Value Measurements: In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which upon adoption will replace various definitions of fair value in existing accounting literature with a single definition, will establish a framework for measuring fair value, and will require additional disclosures about fair value measurements. SFAS 157 clarifies that fair value is the price that would be received to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity and emphasizes that fair value is a market-based measurement and should be based on the assumptions market participants would use. The statement also creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative

reliability of the inputs used in the valuation. This hierarchy is the basis for the disclosure requirements, with fair value estimates based on the least reliable inputs requiring more extensive disclosures about the valuation method used and the gains and losses associated with those estimates. SFAS 157 is required to be applied whenever another financial accounting standard requires or permits an asset or liability to be measured at fair value. The statement does not expand the use of fair value to any new circumstances. The Corporation adopted SFAS 157 on January 1, 2008, and the adoption did not have a material impact on financial condition, results of operations, or liquidity.

Fair Value Option: In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities. The statement allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period. The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings. On January 1, 2008, the Corporation elected the fair value option for residential and commercial real estate loans held for sale. Previously, these loans were carried at the lower-of-cost or fair value after consideration of any SFAS 133 valuation adjustments. Interest rate risk related to these loans was hedged with derivative instruments and application of the fair value option allows for both the loans and the derivatives to be carried at fair value without the burden of applying for hedge accounting under SFAS 133. The election was applied to existing residential and commercial real estate loans held for sale as of January 1, 2008 and is also being applied prospectively to the same types of loans originated or purchased as held for sale. As of the adoption date, the carrying value of the existing loans held for sale was adjusted to fair value through a cumulative-effect adjustment to beginning retained earnings. This adjustment represented an increase in value of $12 million pretax ($8 million net of tax). Prospectively, accounting for residential and commercial real estate loans to be sold at fair value will accelerate the recognition of some gains and losses previously recognized at the time of sale but otherwise is not expected to have a material impact on financial condition, results of operations, or liquidity.

Amendment of FASB Interpretation No. 39: In April 2007, the FASB issued FSP 39-1, Amendment of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. FSP 39-1 permits entities to offset fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting agreement. FSP 39-1 clarifies that the fair value amounts recognized for the right to reclaim cash collateral, or the obligation to return cash collateral, arising from the same master netting arrangement, should also be offset against the fair value of the related derivative instruments. The Corporation has historically presented all of its derivative positions and related collateral on a gross basis.

Effective January 1, 2008, the Corporation adopted a net presentation for derivative positions and related collateral entered into under master netting agreements pursuant to the guidance in FIN 39 and FSP 39-1. The adoption of this guidance resulted in balance sheet reclassifications of certain cash collateral-based short-term investments against the related derivative liabilities and certain deposit liability balances against the related fair values of derivative assets. The effects of these reclassifications will fluctuate based on the fair values of the derivative contracts but overall are not expected to have a material impact on either total assets or total liabilities. The adoption of this presentation change did not have an impact on stockholders’ equity, results of operations, or liquidity.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified the consensus reached in EITF 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to entities that have share-based payment arrangements that entitle employees to receive dividends or dividend equivalents on equity-classified nonvested shares when those dividends or dividend equivalents are charged to retained earnings and result in an income tax deduction. Entities that have share-based payment arrangements that fall within the scope of EITF 06-11 will be required to increase capital surplus for any realized income tax benefit associated with dividends or dividend equivalents paid to employees for equity classified nonvested equity awards. Any increase recorded to capital surplus is required to be included in an entity’s pool of excess tax benefits that are available to absorb potential future tax deficiencies on share-based payment awards. The Corporation adopted EITF 06-11 on January 1, 2008 for dividends declared on share-based payment awards subsequent to this date. The impact of adoption is not expected to have a material impact on financial condition, results of operations, or liquidity.

Accounting for Written Loan Commitments Accounted for at Fair Value: In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 109, which addresses the valuation of written loan

commitments accounted for at fair value through earnings. The guidance in SAB 109 expresses the staff’s view that the measurement of fair value for a written loan commitment accounted for at fair value through earnings should incorporate the expected net future cash flows related to the associated servicing of the loan. Previously under SAB 105, Application of Accounting Principles to Loan Commitments, this component of value was not incorporated into the fair value of the loan commitment. The Corporation adopted the provisions of SAB 109 for written loan commitments entered into or modified after December 31, 2007 related to residential and commercial real estate loans held for sale that are accounted for as derivatives under SFAS 133. The Corporation does not account for any other written loan commitments at fair value through earnings. The impact of SAB 109 will be to accelerate the recognition of the estimated fair value of the servicing inherent in the loan to the commitment date.

Business Combinations: In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this Statement include: the acquisition date will be date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward.

The Corporation will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. At December 31, 2007, the Corporation’s acquired deferred income tax valuation allowances and income tax contingencies totaled $2 million and $32 million, respectively. Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented in the consolidated financial statements.

Accounting for Noncontrolling Interests: In December 2007, the FASB issued SFAS 160, Noncontrolling interests in Consolidated Financial Statements, an Amendment of ARB 51. SFAS 160 establishes new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted.

At December 31, 2007, noncontrolling interests in subsidiaries totaled approximately $135 million and were included in accrued expenses and other liabilities on the consolidated balance sheet. Management is currently evaluating the effects, if any, that SFAS 160 will have upon adoption as this standard will affect the presentation and disclosure of noncontrolling interests in the consolidated financial statements.


3.	Acquisitions and Divestitures

Acquisitions: On May 1, 2006, in a cash transaction, the Corporation completed its acquisition of Forbes First Financial Corporation (Pioneer), a privately held bank holding company operating eight branches in the St. Louis, Missouri, metropolitan area through its subsidiary Pioneer Bank. As of the acquisition date, the fair value of Pioneer’s loans and deposits were $372 million and $430 million, respectively. Goodwill and intangibles resulting from this acquisition totaled $60 million.

On December 1, 2006, the Corporation completed its acquisition of Harbor Florida Bancshares, Inc. (Harbor), a banking company operating 42 branches along the central east coast of Florida through its subsidiary Harbor Federal Savings Bank. Under the terms of the agreement, each share of Harbor common stock was exchanged for 1.2206 shares of National City common stock. Approximately 29 million shares of National City common stock were issued in conjunction with this transaction. The common shares issued were valued at $36.68 per share, representing the average of closing market prices for two days prior and subsequent to the date the exchange ratio was finalized. The total cost of the transaction was $1.1 billion, and included $14 million for the fair value of stock options exchanged.

On January 5, 2007, the Corporation completed its acquisition of Fidelity Bankshares, Inc. (Fidelity), a banking company operating 52 branches along Florida’s southeast coast through its subsidiary Fidelity Federal Bank & Trust. Under the terms of the agreement, Fidelity shareholders elected to receive either $39.50 in cash or 1.0977 shares of National City common stock for each share of Fidelity stock outstanding. Shareholder elections were subject to an allocation process that resulted in 50% of Fidelity’s outstanding shares being exchanged for cash and 50% exchanged for National City common stock, resulting in the issuance of approximately 14 million shares of National City common stock and a cash payment of $506 million. The common shares were valued at $36.16 per share, representing the average of closing market prices for two days prior and subsequent to the date the merger was announced. The total cost of the transaction was $1.0 billion, including $20 million related to stock options settled in cash.

On September 1, 2007, the Corporation completed its acquisition of MAF Bancorp, Inc. (MAF), a banking company operating 82 branches throughout Chicago and Milwaukee and surrounding areas. Under the terms of the agreement, each share of MAF common stock was exchanged for 1.9939 shares of National City common stock. Approximately 67 million shares of National City common stock were issued in conjunction with this transaction. The common shares issued were valued at $27.16 per share, representing the average of closing market prices for two days prior and subsequent to the date the exchange ratio was finalized. The total cost of the transaction was $1.8 billion, and included $35 million for the fair value of stock options exchanged.

Assets and liabilities of acquired entities are recorded at estimated fair values as of respective acquisition dates, and the results of acquired entity operations are included in income from those dates. The fair values of acquired assets and liabilities, including identifiable intangible assets, are finalized as quickly as possible following an acquisition. The purchase price allocations for Harbor and Fidelity are complete. The MAF purchase price allocation is substantially complete; however, its valuations may be subject to revision as additional information becomes available. Purchase accounting adjustments determinable within 12 months of acquisition date result in adjustments to goodwill.

The following table shows the excess purchase price over carrying value of net assets acquired, purchase price allocation and resulting goodwill recorded to date for recent acquisitions.



(In Thousands)	Harbor			Fidelity			MAF

Purchase price	$	1,080,145		$	1,034,828		$	1,844,522
Carrying value of net assets acquired		(344,162	)		(269,008	)		(698,718	)


Excess of purchase price over carrying value of net assets acquired		735,983			765,820			1,145,804
Purchase accounting adjustments
Securities		9,699			(531	)		587
Portfolio loans and loans held for sale		(29,852	)		(52,929	)		(10,684	)
Premises and equipment		(26,351	)		(38,384	)		(379	)
Mortgage servicing rights		(3,253	)		(3,749	)		(16,802	)
Other assets		(9,039	)		(440	)		19,991
Deposits		(1,244	)		(1,416	)		(5,073	)
Borrowings		(769	)		2,854			(2,569	)
Severance and exit costs		11,236			31,123			39,914
Other liabilities		24,169			26,414			9,650
Deferred taxes		28,439			72,093			31,454


Subtotal		739,018			800,855			1,211,893


Core deposit intangibles		(36,935	)		(84,972	)		(153,878	)
Other identifiable intangible assets		(9,108	)		(2,060	)		(618	)


Goodwill	$	692,975		$	713,823		$	1,057,397

The following table summarizes the estimated fair value of net assets acquired related to recent acquisitions.



(In Thousands)	Harbor		Fidelity		MAF

Assets
Cash and cash equivalents	$	242,124	$	142,483	$	141,860
Federal funds sold		—		—		107,709
Securities		389,869		628,068		1,821,230
Loans, net of allowance for loan losses		2,638,892		3,569,353		7,074,697
Premises and other equipment		87,885		132,811		165,764
Goodwill and other intangibles		739,018		800,855		1,211,893
Mortgage servicing rights		4,741		7,074		35,908
Other assets		63,206		95,096		339,999


Total Assets		4,165,735		5,375,740		10,899,060
Liabilities
Deposits		2,389,861		3,375,712		7,351,337
Borrowings		614,680		763,931		1,471,026
Other liabilities		81,049		201,269		232,175


Total Liabilities		3,085,590		4,340,912		9,054,538


Fair value of net assets acquired	$	1,080,145	$	1,034,828	$	1,844,522

The following unaudited pro forma consolidated financial information presents the combined results of operations of the Corporation as if the Pioneer, Harbor, Fidelity and MAF acquisitions had occurred as of the beginning of 2007 and 2006, respectively.



	For the Calendar Year

(Dollars in Thousands, Except Per Share Amounts)	2007		2006

Net interest income	$	4,544,455	$	5,037,670
Provision for loan losses		1,332,701		495,109
Net interest income after provision for loan losses		3,211,754		4,542,561
Noninterest income		2,665,583		4,144,238
Noninterest expense		5,476,864		5,231,068


Income before income tax expense		400,473		3,455,731
Income tax expense		68,351		1,140,938


Net Income	$	332,122	$	2,314,793


Net Income Per Common Share
Basic	$	.51	$	3.23
Diluted		.50		3.18
Average Common Shares Outstanding
Basic		651,006,096		715,763,157
Diluted		658,625,367		727,292,653

The pro forma results include amortization of fair value adjustments on loans, deposits, and debt, amortization of newly created intangibles and post-merger acquisition related charges. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisitions and the impact of additional dilutive securities but does not assume any incremental share repurchases. The pro forma results presented do not reflect cost savings or revenue enhancements anticipated from the acquisitions and are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.

Divestitures: In 2007, the Corporation sold three branches located in western Illinois. The Corporation recognized a gain on this transaction of approximately $16 million. On December 30, 2006, the Corporation completed the sale of its First Franklin nonprime mortgage origination network and related servicing platform. The Corporation recognized a pretax gain of $984 million, or $622 million after tax, on this transaction. The purchase price and the resulting gain are subject to adjustment based on the closing date values of assets and liabilities sold, as well as other negotiated matters. In 2005, the Corporation sold Madison Bank & Trust, an Indiana state chartered bank, including six branches. The Corporation recognized a gain on this transaction of approximately $16 million.


4.	Restructuring Charges

Restructuring programs consist of acquisition integration related activities as well as other strategic initiatives. During the years ended December 31, 2007 and 2006, the Corporation recorded severance and other employee-related expense of $106 million and $33 million, respectively. The severance charges in 2007 were primarily related to staffing reductions in the mortgage business and in corporate support units. The severance charges in 2006 were primarily related to the divestiture of First Franklin and other business activities. Severance and other employee-related costs incurred in 2007 and 2006 included $8 million and $6 million, respectively, of retention benefits for employees associated with acquired or divested units.

Acquisition integration plans were formulated prior to the completion of each acquisition. Costs incurred for acquisition-related employee terminations consist of severance, retention, and outplacement benefits. Severance and outplacement benefit costs were recognized in the allocation of the purchase price to acquired assets and liabilities. Retention benefits were recorded to salaries expense over the required service period. Costs relating to the exit of certain acquired businesses, facility leases, and other contract termination costs were also recognized in the allocation of the purchase price to acquired assets and liabilities. The activity shown in the table below includes severance and restructuring costs associated with the MAF Bancorp acquisition which was completed on September 1, 2007.

Payments will continue to be made for acquisition-related integration costs through December 2010 for severance benefits and through January 2013 for lease obligations related to vacated facilities.

Severance and other employee-related costs, associated with other strategic initiatives and incurred in the normal course of business, are recorded in salaries, benefits and other personnel costs in the income statement. These payments are scheduled to occur through April 2009. Other restructuring costs, which consist primarily of consulting and lease exit costs unrelated to acquisitions, are recorded in third-party services and other noninterest expense, respectively, and are scheduled to occur through December 2010.

Activity in the severance and restructuring liability for the years ended December 31, 2007 and 2006 is presented in the following table. Historically, the majority of severance and other termination expenses have been recorded as unallocated corporate charges within the Parent and Other segment. However, in 2007, severance and other employee-related costs of $36 million, directly associated with staffing reductions in our mortgage operations, were recorded within the Mortgage Banking segment.

For the Calendar Year

December 31, 2007

(In Thousands)

Acquisitions

Other

Total

Beginning balance

40,494

32,110

72,604

Severance and other employee related costs:

Charged to expense

7,666

98,277

105,943

Recognized in purchase price allocation

56,498

—

56,498

Payments

(51,147

)

(52,692

)

(103,839

)

Exit costs, contract terminations and other:

Charged to expense

—

11,017

Recognized in purchase price allocation

12,196

—

12,196

Payments

(13,567

)

(7,771

)

(21,338

)

Ending balance

52,140

80,941

133,081



	For the Calendar Year
	December 31, 2006

(In Thousands)	Acquisitions			Other			Total

Beginning balance	$	35,455		$	52,398		$	87,853
Severance and other employee related costs:
Charged to expense		426			33,056			33,482
Recognized in purchase price allocation		11,967			—			11,967
Payments		(6,097	)		(51,097	)		(57,194	)
Exit costs, contract terminations and other:
Charged to expense		—			3,710			3,710
Recognized in purchase price allocation		4,778			—			4,778
Payments		(6,035	)		(5,957	)		(11,992	)


Ending balance	$	40,494		$	32,110		$	72,604


5.	Securitization Activity

The Corporation has securitized pools of credit card, automobile, and Small Business Administration (SBA) loans. Recent securitization activities are described below.

Credit Card: In 2007, the Corporation securitized a $425 million pool of credit card receivables (Series 2007-1) following the maturity of its Series 2002-1 securitization. A pretax gain of approximately $2 million was recognized on this transaction within loan sale revenue. Retained interests of $31 million were recognized at the date of sale. Transaction costs were $2 million. In 2006, the Corporation securitized a $425 million pool of credit card receivables (Series 2006-1) following the maturity of its Series 2001-1 securitization. A pretax gain of $2 million was recognized on this transaction within loan sale revenue. Retained interests in these loans of $28 million were recognized at the date

of sale. Transaction costs were $1 million. In 2005, the Corporation securitized a $600 million pool of credit card receivables (Series 2005-1) following the maturity of its Series 2000-1 securitization. A pretax gain of $1 million was recorded on this transaction within loan sale revenue. Retained interests in these loans of $37 million were recognized at the date of sale. Transaction costs were $3 million.

Retained interests associated with the above transactions included a seller’s interest in the loans, accrued interest, and an interest-only strip. The initial carrying values of these retained interests were determined by allocating the carrying value among the assets sold and retained based on their relative fair values at their respective dates of sale. The fair value of the interest-only strips were estimated by discounting the projected future cash flows of this securities. The Corporation retained the right to service these loans. Servicing fees to be received approximated the current market rate for servicing fees; therefore, no servicing asset or liability was recognized.

Transaction costs related to each of the above transactions were capitalized and are amortized over the revolving period of each securitization of four years.

Automobile: In 2006, the Corporation exercised an early clean-up call on the outstanding notes of the Series 2002-A automobile securitization. Accordingly, the Corporation redeemed $48 million of loans from the securitization trust at a price equal to unpaid principal plus accrued interest. These loans were recorded at fair value which approximated the purchase price.

In 2005, the Corporation securitized $2.2 billion of fixed-rate, closed-end indirect automobile loans (Series 2005-A). A pretax loss of $29 million was recorded on this transaction within loan sale revenue. Retained interests in the securitized loans recognized upon sale consisting of a subordinated interest in the securitized loans and an interest-only strip. Retained interests were valued at the date of sale by allocating the previous carrying amount between the assets sold and the retained interests based on their relative fair values at the date of sale. The initial carrying value of the subordinated interest and interest-only security of $78 million was estimated at the date of sale by discounting projected future cash flows. The Corporation also retained the right to service these loans, and a servicing asset of $20 million was recognized at the date of sale. Transaction costs associated with this fixed-term securitization were included as a component of the loss on sale.

In 2008, the Corporation will have the option to exercise an early clean-up call on its Series 2004-A securitization of automobile loans.

SBA: The Corporation did not securitize any pools of SBA loans in 2007. During 2006 and 2005, the Corporation securitized pools of SBA loans totaling $205 million and $46 million, respectively. Retained interests in the form of interest-only strips were recognized with an initial carrying value of approximately $5 million and $3 million in 2006 and 2005, respectively. The SBA loans securitized were sold servicing released and all transaction costs were expensed in conjunction with these sales.

Home Equity: As of December 31, 2007 and 2006, the Corporation had no securitized home equity loans. The Corporation obtained securitized home equity loans from a 2004 acquisition and exercised its option to call these securitizations in 2006 and 2005. Accordingly, the cash flows received from securitization trusts shown in the following tables include some activity for securitized home equity loans in 2006 and 2005.

At the inception of each securitization, the assumptions used to value retained interests were as follows:



	Weighted-		Variable			Monthly			Expected
	Average		Annual			Principal			Annual			Annual
	Life		Coupon Rate			Repayment			Credit			Discount
	(in months)		To Investors			Rate			Losses			Rate			Yield

*Credit Card Loans:*
Interest-only strip (Series 2005-1)		3.2		3.75	%		18.21	%		5.35	%		15.00	%		12.00	%
Interest-only strip (Series 2006-1)		3.1		4.81			19.01			4.77			15.00			13.79
Interest-only strip (Series 2007-1)		3.1		5.39			19.19			4.04			15.00			13.13



	Weighted-		Monthly
	Average		Prepayment			Expected			Annual			Weighted-
	Life		Speed			Cumulative			Discount			Average
	(in months)		(% ABS)			Credit Losses			Rate			Coupon

*Automobile Loans:*
Interest-only strip (Series 2004-A)		21.8		1.50	%		1.75	%		12.00	%		6.79	%
Servicing asset (Series 2004-A)		21.8		1.50			1.75			11.00			6.79
Interest-only strip (Series 2005-A)		16.6		1.50			2.18			12.00			7.06
Servicing asset (Series 2005-A)		12.5		1.50			2.18			10.00			7.06

A summary of the components of managed loans, representing both owned and securitized loans, along with quantitative information about delinquencies and net credit losses follows:

As of December 31, 2007

For the Calendar Year

Loans Past

Due 30

Principal

Days or

Average

Net Credit

(In Millions)

Balance

More

Balances

Losses

Type of loan:

Credit card

3,301.9

135.3

2,822.1

120.5

Automobile

766.4

25.5

1,151.8

11.0

SBA

162.9

11.6

203.0

—

Total loans managed or securitized

4,231.2

172.4

4,176.9

131.5

Less loans securitized:

Credit card

1,450.0

54.8

1,359.2

55.1

Automobile

688.8

20.3

1,028.3

12.0

SBA

162.9

11.6

203.0

—

Less loans held for securitization:

Credit card

—

90.8

—

Loans held in portfolio

1,929.5

85.7

1,495.6

64.4



	As of December 31, 2006				For the Calendar Year

			Loans Past
			Due 30
	Principal		Days or		Average		Net Credit
(In Millions)	Balance		More		Balances		Losses

Type of loan:
Credit card	$	2,635.2	$	110.4	$	2,400.5	$	95.1
Automobile		1,624.4		37.5		2,260.6		17.3
SBA		234.4		67.9		96.7		—


Total loans managed or securitized		4,494.0		215.8		4,757.8		112.4
Less loans securitized:
Credit card		1,024.7		45.4		1,325.4		49.2
Automobile		1,439.5		26.1		1,985.8		15.7
SBA		234.4		67.9		96.7		—
Less loans held for securitization:
Credit card		425.0		—		124.0		—


Loans held in portfolio	$	1,370.4	$	76.4	$	1,225.9	$	47.5

Certain cash flows received from the securitization trusts follow:



	For the Calendar Year

	2007						2006

	Credit						Credit				Home
(In Millions)	Card		Automobile		SBA		Card		Automobile		Equity		SBA

Proceeds from new securitizations	$	425.0	$	—	$	—	$	425.0	$	—	$	—	$	223.2
Proceeds from collections reinvested in previous securitizations		3,027.7		—		—		2,752.2		—		—		—
Servicing fees received		27.3		10.5		—		26.9		20.1		—		—
Other cash flows received on interests that continue to be held		84.8		5.0		2.5		92.3		29.5		—		1.4
Proceeds from sales of previously charged-off accounts		3.8		—		—		4.7		—		—		—
Purchases of delinquent or foreclosed assets		—		—		—		—		—		.1		—



	For the Calendar Year

	2005

	Credit				Home
(In Millions)	Card		Automobile		Equity		SBA

Proceeds from new securitizations	$	600.0	$	2,103.9	$	—	$	44.7
Proceeds from collections reinvested in previous securitizations		2,789.3		—		2.7		—
Servicing fees received		28.1		8.7		.3		—
Other cash flows received on interests that continue to be held		70.8		15.7		.9		.7
Proceeds from sales of previously charged-off accounts		1.0		—		—		—
Purchases of delinquent or foreclosed assets		—		—		1.2		—

The Corporation holds certain interests in securitized credit card and automobile loans consisting of interest-only strips and servicing assets. The table below presents the weighted-average assumptions used to measure the fair values of these retained interests as of December 31, 2007. The sensitivity of these fair values to immediate 10% and 20% adverse changes in key assumptions is also shown. These sensitivities are hypothetical. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.



			Weighted-		Variable			Monthly			Expected
			Average		Annual			Principal			Annual			Annual
	Fair		Life		Coupon Rate to			Repayment			Credit			Discount
(Dollars in Millions)	Value		(in months)		Investors			Rate			Losses			Rate			Yield

*Credit Card Loans*
Interest-only strips		$5.8		3.2		4.92	%		18.41	%		4.29	%		15.00	%		12.84	%
Decline in fair value of 10% adverse change						$1.8			$0.4			$1.7			$—			$4.8
Decline in fair value of 20% adverse change						3.7			0.7			3.1			—			5.8



					Monthly			Expected
			Weighted-		Prepayment			Cumulative			Annual			Weighted-
	Fair		Average Life		Speed			Credit			Discount			Average
(Dollars in Millions)	Value		(in months)		(% ABS)^(a)			Losses			Rate			Coupon

*Automobile Loans*
Interest-only strip		$13.5		3.0		1.26	%		1.65	%		12.00	%		7.03	%
Decline in fair value of 10% adverse change						$—			$2.4			$0.2			$2.9
Decline in fair value of 20% adverse change						—			5.2			0.3			5.5
Servicing asset^(b)		$ 3.6		5.9		1.26	%		1.65	%		10.12	%		7.03	%
Decline in fair value of 10% adverse change						$0.2			$—			$—			$—
Decline in fair value of 20% adverse change						0.5			—			—			—


(a)		Absolute prepayment speed.
(b)		Carrying value of servicing asset at December 31, 2007 was $3 million.


6.	Leases

National City leases commercial equipment and automobiles to customers. The leases are classified as either lease financings or operating leases based on the terms of the lease arrangement. When a lease is classified as a lease financing, the future lease payments, net of unearned income and the estimated residual value of the leased property at the end of the lease term, are recorded as an asset within the loan portfolio. The amortization of the unearned income is recorded as interest income. When a lease is classified as an operating lease, the cost of the leased property, net of depreciation, is recorded as equipment leased to others on the Consolidated Balance Sheets. Rental income is recorded in noninterest income while the depreciation on the leased property is recorded in noninterest expense. At the expiration of a lease, the leased property is either sold or a new lease agreement is initiated.

Lease Financings: Lease financings, included in portfolio loans on the Consolidated Balance Sheet, consist of direct financing and leveraged leases of commercial and other equipment, primarily computers and office equipment, manufacturing and mining equipment, commercial trucks and trailers, airplanes, medical, construction, data processing, along with retail automobile lease financings. Commercial equipment lease financings are included in commercial leases, while automobile lease financings are included in other consumer loans. The Corporation no longer originates automobile leases; accordingly, this portfolio will runoff over time as the leases expire and the automobiles are sold.

A summary of lease financings by type at December 31:



(In Thousands)	2007		2006

Commercial
Direct financings	$	4,279,751	$	3,868,271
Leveraged leases		157,411		214,669


Total commercial lease financings		4,437,162		4,082,940
Consumer
Retail automobile lease financings		142,342		299,704


Total net investment in lease financings	$	4,579,504	$	4,382,644

The components of the net investment in lease financings by type at December 31:



(In Thousands)	2007			2006

Commercial
Lease payments receivable	$	4,711,570		$	4,260,255
Estimated residual value of leased assets		392,794			408,809


Gross investment in commercial lease financings		5,104,364			4,669,064
Unearned income		(667,202	)		(586,124	)


Total net investment in commercial lease financings	$	4,437,162		$	4,082,940


Consumer
Lease payments receivable	$	38,667		$	117,176
Estimated residual value of leased assets		109,070			201,723


Gross investment in consumer lease financings		147,737			318,899
Unearned income		(5,395	)		(19,195	)


Total net investment in consumer lease financings	$	142,342		$	299,704

A rollforward of the residual value component of lease financings by type follows:



	For the Calendar year

(In Thousands)	2007			2006

Commercial
Beginning balance	$	408,809		$	482,049
Additions		132,768			95,174
Runoff		(148,348	)		(156,972	)
Write-downs		(435	)		(11,442	)


Ending balance	$	392,794		$	408,809


Consumer
Beginning balance	$	201,723		$	231,582
Runoff		(92,653	)		(29,859	)


Ending balance	$	109,070		$	201,723

At December 31, 2007, the minimum future lease payments to be received from lease financings by type were as follows:



											2013 and
(In Millions)	2008		2009		2010		2011		2012		Beyond		Total

Commercial	$	1,568.4	$	1,117.7	$	794.5	$	499.9	$	267.9	$	463.2	$	4,711.6
Consumer		13.2		23.1		2.4		—		—		—		38.7


Total	$	1,581.6	$	1,140.8	$	796.9	$	499.9	$	267.9	$	463.2	$	4,750.3

Equipment Leased to Others: Equipment leased to others represents equipment owned by National City that is leased to customers under operating leases. Commercial equipment includes aircraft and other transportation, manufacturing, construction, data processing, medical, and office equipment leased to commercial customers while consumer equipment consists of automobiles leased to retail customers. The totals below also include the carrying value of any equipment previously leased to customers under either operating or financing leases that are in the process of being either renewed or sold.

A summary of the net carrying value of equipment leased to others by type at December 31 follows:



(In Thousands)	2007			2006

Commercial
Cost	$	543,085		$	616,787
Accumulated depreciation		(187,733	)		(151,358	)


Net carrying value of commercial leased equipment		355,352			465,429
Consumer
Cost		45,828			174,586
Accumulated depreciation		(26,391	)		(67,063	)


Net carrying value of consumer leased equipment		19,437			107,523


Total net carrying value of equipment leased to others	$	374,789		$	572,952

Depreciation expense on equipment leased to others totaled $114 million in 2007, $155 million in 2006, and $197 million in 2005.

At December 31, 2007, the minimum future lease payments to be received from equipment leased to others by type were as follows:



											2013 and
(In Millions)	2008		2009		2010		2011		2012		Beyond		Total

Commercial	$	94.7	$	72.4	$	45.2	$	26.5	$	14.6	$	29.4	$	282.8
Consumer		1.8		.6		—		—		—		—		2.4


Total	$	96.5	$	73.0	$	45.2	$	26.5	$	14.6	$	29.4	$	285.2


7.	Loans, Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments

Total portfolio loans outstanding are recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments of $956 million and $387 million at December 31, 2007 and 2006, respectively. Loans held for sale are recorded at lower of cost or market on an aggregate basis by loan type. The valuation allowance recognized to reduce the carrying value of mortgage loans held for sale to fair value was $605 thousand and $65 million at December 31, 2007 and 2006, respectively.

The Corporation has the option to repurchase certain delinquent loans that were sold in prior periods. The Corporation has recognized these loans and the related repurchase obligation on its Consolidated Balance Sheet as follows:



	December 31

(In Millions)	2007		2006


Residential real estate portfolio loans	$	334	$	297
Commercial real estate loans held for sale		3		8


Other borrowed funds	$	337	$	305

To provide for probable losses in the loan portfolio, National City maintains an allowance for loan losses and an allowance for losses on lending-related commitments.

Activity in the allowance for loan losses follows:



	For the Calendar Year

(In Thousands)	2007			2006			2005


Balance at beginning of period	$	1,131,175		$	1,094,047		$	1,188,462
Provision for loan losses		1,325,903			488,208			300,531
Charge-offs		(844,524	)		(645,140	)		(602,902	)
Recoveries		183,446			203,612			222,042


Net charge-offs		(661,078	)		(441,528	)		(380,860	)
Other^(a)		(34,272	)		(9,552	)		(14,086	)


Balance at end of period	$	1,761,728		$	1,131,175		$	1,094,047


(a)	Includes the allowance for loan losses associated with acquisitions, portfolio loans transferred to held for sale, and in 2007 and 2006, reinsurance claims paid to third parties.

In 2007 and 2006, the Corporation’s insurance subsidiary provided reinsurance to a third party who provides the primary mortgage insurance on certain portfolio loans. Under this arrangement, National City assumed a 50% pro rata share of credit losses on the insured portfolio loans subject to certain limits. The provision for credit losses included expected reinsurance losses associated with insured nonprime mortgage loans of $48 million and $79 million for 2007 and 2006, respectively.

Activity in the allowance for losses on lending-related commitments follows:



	For the Calendar Year

(In Thousands)	2007			2006			2005


Balance at beginning of period	$	77,986		$	83,601		$	100,538
Net provision for losses on lending-related commitments		(13,223	)		(5,615	)		(16,937	)


Balance at end of period	$	64,763		$	77,986		$	83,601

Nonperforming loans totaled $1.1 billion and $500 million as of December 31, 2007 and 2006, respectively. For loans classified as nonperforming at December 31, 2007, the contractual interest due and actual interest recognized on those loans during 2007 was $114 million and $34 million, respectively.

Impaired loans, as defined under SFAS 114, are included in nonperforming loans. Average impaired loans for 2007, 2006, and 2005 totaled $239 million, $158 million, and $108 million, respectively. During 2007, 2006, and 2005, interest recognized on impaired loans while they were considered impaired was not material. The majority of the loans deemed impaired were evaluated using the fair value of the collateral as the measurement method. The following table presents details on the allowance for loan losses related to impaired loans.



	December 31

(In Thousands)	2007		2006


Impaired loans with an associated allowance	$	207,421	$	118,127
Impaired loans without an associated allowance		126,259		71,360


Total impaired loans	$	333,680	$	189,487


Allowance for loan losses allocated to impaired loans	$	48,320	$	29,545

8. Securities

Securities available for sale follow:

December 31, 2007

Amortized

Unrealized

Fair

(In Thousands)

Cost

Gains

Losses

Value

U.S. Treasury

1,055,520

43,387

—

1,098,907

Federal agency

262,314

5,158

152

267,320

Mortgage-backed securities

6,610,008

38,529

64,306

6,584,231

Asset-backed and corporate debt securities

204,345

516

13,373

191,488

States and political subdivisions

382,097

4,282

489

385,890

Other

194,024

10,379

982

203,421

Total securities

8,708,308

102,251

79,302

8,731,257



	December 31, 2006

	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value


U.S. Treasury	$	1,051,590	$	8,872	$	12,001	$	1,048,461
Federal agency		250,054		2,458		1,589		250,923
Mortgage-backed securities		5,305,629		41,119		51,919		5,294,829
Asset-backed and corporate debt securities		174,829		2,188		20		176,997
States and political subdivisions		499,563		7,205		972		505,796
Other		221,327		10,834		347		231,814


Total securities	$	7,502,992	$	72,676	$	66,848	$	7,508,820

Other securities included retained interests from securitizations as well as equity securities.

The following table presents the age of gross unrealized losses and associated fair value by investment category.

December 31, 2007

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(In Thousands)

Value

Losses

Value

Losses

Value

Losses

U.S. Treasury

—

Federal agency

—

35,792

152

35,792

152

Mortgage-backed securities

1,955,482

26,552

1,589,876

37,754

3,545,358

64,306

Asset-backed securities

155,846

13,352

2,638

158,484

13,373

States and political subdivisions

17,691

101

42,104

388

59,795

489

Other

43,859

982

—

43,859

982

Total

2,172,878

40,987

1,670,410

38,315

3,843,288

79,302



	December 31, 2006

	Less Than 12 Months				12 Months or More				Total

	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses


U.S. Treasury	$	121,826	$	1,110	$	465,376	$	10,891	$	587,202	$	12,001
Federal agency		68,273		97		79,614		1,492		147,887		1,589
Mortgage-backed securities		1,286,002		11,328		1,957,546		40,591		3,243,548		51,919
Asset-backed securities		7,269		18		377		2		7,646		20
States and political subdivisions		4,279		5		57,953		967		62,232		972
Other		19,215		191		15,593		156		34,808		347


Total	$	1,506,864	$	12,749	$	2,576,459	$	54,099	$	4,083,323	$	66,848

Securities available for sale are reviewed for possible other-than-temporary impairment on a quarterly basis. During this review, management considers the severity and duration of the unrealized losses as well as its intent and ability to hold the securities until recovery, taking into account balance sheet management strategies and its market view and outlook. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer or any credit enhancement providers, and the quality of the underlying collateral. During 2007, management recognized $4 million of other-than-temporary impairment losses on FNMA and FHLMC perpetual preferred securities.

Management also reviewed mortgage-backed and asset-backed securities with unrealized losses for other-than-temporary impairment. Management believes the primary reason for the unrealized losses on these securities is general credit spread widening caused by market concern over the credit quality of residential mortgages, an imbalance between market supply and demand for these securities, and in some instances, an increase in the risk-free interest rate at December 31, 2007 compared to the risk-free interest rate at the security’s acquisition date. All the issuers of the mortgage-backed and asset-backed securities in the Corporation’s portfolio are of investment grade quality. There have been no recent credit downgrades of these securities by either Moody’s Investors Service or Standard & Poors. For certain securities with unrealized losses, management also reviewed the performance of the underlying collateral and considered the securitization structure, but did not find any indication of any security-specific credit concerns. Management has the intent and ability to hold these securities until recovery. Therefore, other than the FNMA and FHLMC securities mentioned above, management concluded that none of the unrealized losses on the securities in the available-for-sale portfolio represent an other-than-temporary impairment as of December 31, 2007.

The following table presents the amortized cost, fair value, and weighted-average yield of securities at December 31, 2007 by maturity:



																Weighted-
				1 to 5			5 to 10			After 10						Average
(Dollars in Thousands)	Within 1 Year			Years			Years			Years			Total			Yield^(a)


U.S. Treasury	$	12		$	488,193		$	556,770		$	10,545		$	1,055,520			4.41	%
Federal agency		95,688			137,121			11,281			18,224			262,314			4.74	%
Mortgage-backed securities		79,851			3,774,969			2,256,415			498,773			6,610,008			5.34	%
Asset-backed and corporate debt securities		25,606			73,656			7,163			97,920			204,345			6.24	%
States and political subdivisions		57,948			180,660			70,879			72,610			382,097			7.19	%
Other		11,610			45,639			—			136,775			194,024			4.90	%


Amortized cost	$	270,715		$	4,700,238		$	2,902,508		$	834,847		$	8,708,308


Fair value	$	271,071		$	4,707,446		$	2,922,872		$	829,868		$	8,731,257


Weighted-Average Yield^(a)		5.17	%		5.14	%		5.48	%		5.78	%		5.31	%


(a)	Yield on debt securities only; equity securities and retained interests in securitizations are excluded.

Weighted-average yields are based on amortized cost. Yields on tax-exempt securities are calculated on a tax-equivalent basis using the marginal Federal income tax rate of 35%. Mortgage-backed securities and retained interests in securitizations are assigned to maturity categories based on their estimated average lives. Equity securities are included in other securities in the After 10 Years category. At December 31, 2007, the fair value of securities pledged to secure public and trust deposits, U.S. Treasury notes, security repurchase agreements, FHLB borrowings, and derivative instruments totaled $8.0 billion. At December 31, 2007, there were no securities of a single issuer which exceeded 10% of stockholders’ equity.

In 2007, 2006, and 2005, gross securities gains were $34 million, $18 million, and $43 million, respectively, while gross securities losses were $12 million, $18 million, and $16 million, respectively.

9. Trading Assets and Liabilities

Securities, loans, and derivative instruments are classified as trading when they are entered into for the purpose of making short-term profits or to provide risk management products to customers. Certain securities used to manage risk related to mortgage servicing assets are also classified as trading securities. All trading instruments are carried at fair value. Trading securities primarily include U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, and corporate bonds. Trading loans include the guaranteed portion of Small Business Administration loans and syndicated commercial loans held for distribution to others. Trading securities and loans are classified within other investments on the balance sheet. Trading derivative instruments principally represent interest-rate swap and option contracts and foreign currency futures and forward contracts entered into to meet the risk management needs of commercial banking customers. The fair values of trading derivatives are included in derivative assets and derivative liabilities on the balance sheet. Further detail on derivative instruments is included in Note 25. Trading liabilities also include securities sold short, which are obligations to purchase securities that have already been sold to other third parties. Liabilities for securities sold short are classified within borrowed funds on the balance sheet.

The following table presents the fair values of trading assets and liabilities.



	December 31

(In Thousands)	2007		2006


Trading assets:
Securities	$	804,547	$	447,031
Loans		177,755		213,514
Derivative instruments		234,451		118,962


Total trading assets	$	1,216,753	$	779,507


Trading liabilities:
Securities sold short	$	7,876	$	52,122
Derivative instruments		202,297		97,585


Total trading liabilities	$	210,173	$	149,707

Trading revenue includes both net interest income from trading securities, loans, and securities sold short, and gains and losses from changes in the fair value of trading instruments. Unrealized losses recorded within trading revenue for trading securities held at December 31, 2007 totaled $(1) million, compared to unrealized gains of $5 million for

December 31, 2006. Gains and losses on trading instruments are included either within loan servicing revenue, brokerage revenue, or other income on the income statement. Total revenue from trading activities was as follows:



	For the Calendar Year

(In Thousands)	2007			2006			2005


Net interest income	$	35,866			$47,555		$	38,492
Gains (losses) in noninterest income:
Securities and securities sold short		(4,104	)		14,112			(476	)
Loans		(7,869	)		(14,888	)		560
Derivative instruments		18,936			8,604			38,349


Subtotal		6,963			7,828			38,433


Total net trading revenue	$	42,829			$55,383		$	76,925

10. Principal Investments

The principal investment portfolio includes direct investments in private and public companies, as well as indirect investments in private equity funds which are managed by third parties. The direct portfolio consists of investments in the consumer/retail, manufacturing, automotive, commercial services, healthcare, commercial/industrial distribution, and building products industries with the largest industry, consumer/retail, constituting approximately 14% of the total principal investment portfolio. The indirect portfolio is diversified according to the terms of the fund’s agreement and the general partner’s direction. Principal investments are classified within other investments as well as other assets on the balance sheet. A rollforward of principal investments follows:



	For the Calendar Year

(In Thousands)	2007			2006


Direct Investments:
Carrying value at beginning of period	$	311,218		$	316,974
Investments – new fundings		87,807			71,104
Returns of capital and write-offs		(21,849	)		(73,571	)
Fair value adjustments		9,715			(3,289	)


Carrying value at end of period	$	386,891		$	311,218


Indirect Investments:
Carrying value at beginning of period	$	354,278		$	343,864
Investments – new fundings		87,017			88,202
Returns of capital and write-offs		(56,681	)		(76,200	)
Fair value adjustments		3,960			(1,588	)


Carrying value at end of period	$	388,574		$	354,278


Total Principal Investments:
Carrying value at beginning of period	$	665,496		$	660,838
Investments – new fundings		174,824			159,306
Returns of capital and write-offs		(78,530	)		(149,771	)
Fair value adjustments		13,675			(4,877	)


Carrying value at end of period	$	775,465		$	665,496



	For the Calendar Year

(In Thousands)	2007		2006		2005


Principal investment revenue^(a)	$	27,783	$	29,197	$	28,273


Net principal investment gains^(b)	$	95,524	$	117,882	$	57,156


(a)	Consists primarily of interest, dividends, and fee income
(b)	Consists primarily of fair value adjustments and realized gains and losses on investments

The principal investment portfolio is managed primarily within the Commercial Banking-National line of business. Accounting policies for principal investments are included in Note 1. Commitments to fund principal investments are discussed in Note 22.

11. Goodwill and Other Intangible Assets

The carrying value of goodwill was $5.4 billion and $3.8 billion at December 31, 2007 and 2006, respectively. A rollforward of goodwill by line of business for 2007 and 2006 follows:



	January 1,		Goodwill			Impairment			December 31,
(In Thousands)	2007		Adjustments^(a)			Losses			2007


Retail Banking	$	1,501,931	$	1,226,175		$	—		$	2,728,106
Commercial Banking-Regional		1,671,003		409,792			—			2,080,795
Commercial Banking-National		336,897		12,109			—			349,006
Mortgage Banking		76,031		104,685			(180,716	)		—
Asset Management		230,049		35,951			—			266,000
Parent and Other		—		—			—			—


Total	$	3,815,911	$	1,788,712		$	(180,716	)	$	5,423,907





	January 1,		Goodwill			Impairment			December 31,
(In Thousands)	2006		Adjustments^(a)			Losses			2006


Retail Banking	$	1,025,340	$	476,591		$	—		$	1,501,931
Commercial Banking-Regional		1,450,547		220,456			—			1,671,003
Commercial Banking-National		338,097		(1,200	)		—			336,897
Mortgage Banking		62,392		13,639			—			76,031
Asset Management		230,701		(652	)		—			230,049
Parent and Other		206,032		(206,032	)		—			—


Total	$	3,313,109	$	502,802		$	—		$	3,815,911


(a)	Represents goodwill associated with acquisitions, purchase accounting adjustments, as well as the realignment of goodwill among segments.

In 2007, the Corporation completed the acquisitions of MAF Bancorp, Inc. and Fidelity Bankshares, Inc., which increased goodwill by $1.1 billion and $714 million, respectively. The goodwill associated with these acquisitions was allocated to the business segments based on the relative fair value that each acquisition added to these segments, as shown in the table above. Retail Banking received the largest allocation. The fair values upon which the allocations were based were estimated based on generally accepted valuation techniques including discounted projected cash flows, earnings multiples, and comparable transactions. Refer to Note 3 for further discussion on recent acquisitions.

During 2007, the mortgage industry experienced adverse market conditions. During the annual impairment review, it was determined that the fair value of the Mortgage Banking segment was less than its carrying value. A discounted cash flow model was used to calculate the fair value of the business segment by applying assumptions that a market participant would use taking into account the timing and the risk of the related cash flows. The impairment loss was calculated as the excess of the carrying amount of the goodwill over the implied fair value of the business. The implied fair value of the business was based upon the excess of the recorded and unrecorded assets and liabilities over the previously determined fair value of the Mortgage Banking segment. The resulting impairment loss was $181 million. As noted in the table above, there is no goodwill remaining related to the Mortgage Banking segment at December 31, 2007.

In 2006, the Corporation completed the acquisitions of Harbor Florida Bancshares, Inc. and Forbes First Financial which added $682 million and $43 million, respectively, to goodwill. This goodwill was principally allocated to the Retail Banking and Commercial Banking-Regional segments based on the relative fair value that each acquisition added to these segments. Also in 2006, the Corporation sold its First Franklin nonprime mortgage origination and servicing

platform. Goodwill of $206 million was included in the carrying amount of net assets sold in determining the gain realized upon sale. Goodwill associated with First Franklin was included within the Parent and Other segment.

Finite-lived intangible assets capitalized on the balance sheet include core deposit, credit card and other intangibles. Recent acquisitions added $239 million of core deposit intangibles and $7 million of other intangibles in 2007. The amortization periods for newly capitalized intangibles are ten years for core deposits and one to ten years for other intangibles. A summary of these intangible assets at December 31 follows:



(In Thousands)	2007		2006


Core deposit intangibles
Gross carrying amount	$	475,467	$	239,289
Less: accumulated amortization		144,727		85,876


Net carrying amount		330,740		153,413


Credit card intangibles
Gross carrying amount		6,310		7,699
Less: accumulated amortization		4,357		2,914


Net carrying amount		1,953		4,785


Other intangibles
Gross carrying amount		78,449		62,183
Less: accumulated amortization		55,319		36,733


Net carrying amount		23,130		25,450


Total finite-lived intangibles
Gross carrying amount		560,226		309,171
Less: accumulated amortization		204,403		125,523


Net carrying amount	$	355,823	$	183,648

Amortization expense on finite-lived intangible assets totaled $82 million, $50 million, and $76 million for 2007, 2006, and 2005, respectively. Amortization expense on finite-lived intangible assets is expected to total $80 million, $69 million, $58 million, $47 million, and $37 million for fiscal years 2008 through 2012, respectively.

12. Servicing Assets

The Corporation has obligations to service residential mortgage loans, commercial real estate loans, automobile loans, and other consumer loans. Classes of servicing assets are identified based on loan type and the method of managing the risks associated with these assets. A description of the various classes of servicing assets follows.

Residential Mortgage Servicing Rights: The Corporation recognizes mortgage servicing right (MSR) assets on residential real estate loans when it retains the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. MSRs are subject to declines in value from actual or expected prepayments of the underlying loans. The Corporation manages this risk by hedging the fair value of MSRs with securities and derivative instruments which are expected to increase in value when the value of MSRs declines.

Effective January 1, 2006, the Corporation adopted the provisions of SFAS 156 and elected the fair value measurement method for MSRs. Upon adoption, the carrying value of the MSRs was increased to fair value by recognizing a cumulative effect adjustment of $26 million pretax, or $17 million after tax. Management selected the fair value measurement method of accounting for MSRs to be consistent with its risk management strategy to hedge the fair value of these assets. The fair value method of accounting for MSRs matches the accounting for the related securities and derivative instruments. Changes in the fair value of MSRs, as well as changes in fair value of the related securities and derivative instruments, are recognized each period within loan servicing revenue on the income statement.

On December 30, 2006, the First Franklin nonprime mortgage servicing platform and servicing rights valued at $223 million were sold.

Changes in the carrying value of MSRs, accounted for at fair value, follow:



	For the Calendar Year

(In Thousands)	2007			2006


Balance at beginning of period	$	2,094,387		$	2,115,715
Cumulative effect of change in accounting		—			26,392
Additions:
From loans sold with servicing retained		673,086			576,023
From acquisitions		42,982			4,741
Subtractions from sales of servicing rights		—			(222,730	)
Changes in fair value due to:
Time decay and payoffs^(a)		(344,282	)		(403,969	)
Implementation of internal prepayment model		—			(55,983	)
All other changes in valuation inputs or assumptions^(b)		59,669			54,198


Fair value of MSRs at end of period	$	2,525,842		$	2,094,387


Unpaid principal balance of loans serviced for others (in millions)	$	179,437		$	162,264


(a)	Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that paid down or paid off during the period.
(b)	Represents MSR value change resulting primarily from market-driven changes in interest rates.

The fair value of MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage loan prepayment assumptions are estimated by an internal proprietary model and consider empirical data drawn from the historical performance of the Corporation’s managed loan servicing portfolio.

Management periodically obtains third-party valuations of the MSR portfolio to assess the reasonableness of the fair value calculated by its internal valuation model.

The key economic assumptions used in determining the fair value of MSRs capitalized during 2007 and 2006 were as follows:



	2007			2006

Weighted-average life (in years)		6.1			3.4
Weighted-average CPR		16.32	%		29.88	%
Spread over forward interest rate swap rates^(a)		600			—
Weighted-average discount rate^(b)		10.14			11.49


(a)		Utilized to discount the servicing cash flows for the months of May through December 2007.
(b)		Utilized to discount the servicing cash flows for the months of January through April 2007 and in 2006.

The key economic assumptions used in determining the fair value of MSRs at year end were as follows:



	December 31
	2007			2006


Weighted-average life (in years)		5.0			5.0
Weighted-average CPR		14.21	%		17.66	%
Spread over forward interest rate swap rates		579			—
Weighted-average discount rate		—			9.77

Commercial Real Estate Servicing Assets: Commercial real estate servicing assets are recognized upon selling commercial real estate loans into the secondary market, while retaining the obligation to service those loans, or from purchasing or assuming the right to service commercial real estate loans originated by others. These servicing assets are initially measured at fair value and subsequently accounted for using the amortization method. Under this method, the assets are amortized in proportion to and over the period of estimated servicing income and are evaluated for impairment on a quarterly basis. For purposes of the impairment analysis, management stratifies these servicing assets by loan type as well as by the term of the underlying loans. When the carrying value exceeds the fair value and is believed to be temporary, a valuation allowance is established by a charge to loan servicing revenue in the income statement. Other-than-temporary impairment is recognized when the recoverability of the carrying value is determined to be remote. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the servicing asset. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the servicing asset and the valuation allowance, precluding recognition of subsequent recoveries. There were no other-than-temporary impairments on commercial real estate servicing assets recognized during 2007 or 2006.

The fair value of commercial real estate servicing assets is estimated with an internal valuation model, or by obtaining a third-party opinion of value from Mortgage Industry Advisory Corporation. Both methods are based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, prepayments, and servicing costs. The internal valuation model is validated at least annually through a third-party valuation.

Commercial real estate servicing assets are classified in other assets on the balance sheet. Changes in the carrying value of the commercial real estate servicing assets and the associated valuation allowance follow:



	For the Calendar Year
(In Thousands)	2007			2006


Commercial real estate servicing assets
Balance at beginning of period	$	146,867		$	138,408
Additions:
From loans sold with servicing retained		21,738			25,333
From assumptions of servicing		276			1,233
From purchases of servicing		5,025			3,623
Subtractions:
Amortization		(25,072	)		(21,501	)
Sales		(741	)		(229	)


Carrying value before valuation allowance at end of period		148,093			146,867


Valuation allowance
Balance at beginning of period		(957	)		(1,075	)
Impairment (charges) recoveries		(35	)		118


Balance at end of period		(992	)		(957	)


Net carrying value of servicing assets at end of period	$	147,101		$	145,910


Unpaid principal balance of commercial real estate loans serviced for others (in millions)	$	17,818		$	16,701


Fair value of servicing assets:
Beginning of period	$	188,716		$	163,182
End of period		183,342			188,716

The key economic assumptions used to estimate the fair value of these servicing assets at December 31, 2007 and 2006 were as follows:



	December 31
	2007			2006


Weighted-average life (in years)		8.1			8.3
Weighted-average discount rate		13.13	%		13.31	%

Other Consumer Loans: The Corporation also has servicing assets related to sales or securitizations of automobile loans and certain home equity loans and home equity lines of credit. These servicing assets are accounted for using the amortization method and are included in other assets on the balance sheet. The servicing asset related to securitized automobile loans was $3 million and $8 million at December 31, 2007 and 2006, respectively. The servicing asset related to home equity loans and lines of credit was $27 million and $22 million at December 31, 2007 and 2006, respectively. No servicing asset or liability has been recognized related to the Corporation’s obligation to service credit card loans as the fee received for performing this service is deemed to approximate the amount that would be paid to fairly compensate a substitute servicer, should one be required.

Contractual Servicing Fees: Contractual servicing fees, including late fees and ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within loan servicing revenue on the income statement.



	For the Calendar Year
(In Thousands)	2007		2006		2005


Residential real estate	$	534,975	$	625,007	$	533,291
Credit card		99,041		110,105		78,105
Commercial real estate		37,365		31,696		25,843
Automobile		19,641		35,894		11,478
Home equity lines of credit		53,807		26,957		746
Home equity loans		15,162		3,838		—


Total contractual servicing fees	$	759,991	$	833,497	$	649,463


13.	Properties and Equipment

The composition of properties and equipment follows:



	December 31

(In Thousands)	2007		2006


Land	$	378,133	$	245,249
Buildings and leasehold improvements		1,352,497		1,074,422
Equipment		1,152,903		1,058,034


		2,883,533		2,377,705
Less accumulated depreciation and amortization		1,176,046		975,555


Net properties and equipment	$	1,707,487	$	1,402,150

Depreciation and amortization of properties and equipment, including assets recorded under capital leases, totaled $249 million in 2007, $243 million in 2006, and $229 million in 2005. Unamortized internally developed software costs were $159 million and $194 million at December 31, 2007 and 2006, respectively. Amortization of internally developed software costs totaled $58 million in 2007, $43 million in 2006, and $36 million in 2005. During 2007, the Corporation recognized a fixed asset impairment charge of $43 million on internally developed software used to originate mortgage loans within its former correspondent lending business. Adverse conditions in the mortgage markets in 2007 led to the curtailment of certain mortgage products and the exit of the correspondent lending business. As a result of these conditions, this asset, along with certain other mortgage-related software, was deemed impaired. This charge was recorded within the Mortgage Banking segment. In 2005, the Corporation recognized an $18 million impairment charge on certain under-utilized buildings. This change was recorded within the Parent and Other segment. There were no significant fixed asset impairments in 2006.


14.	Federal Funds Borrowed and Security Repurchase Agreements

Detail of federal funds borrowed and security repurchase agreements follows:



(Dollars in Thousands)	2007			2006			2005

Balance at December 31:
Federal funds borrowed	$	1,215,640		$	1,526,807		$	3,101,648
Security repurchase agreements		3,884,545			3,757,190			3,397,606
Maximum outstanding at any month end:
Federal funds borrowed		5,322,681			4,824,432			6,887,983
Security repurchase agreements		4,632,773			3,877,339			3,697,789
Daily average amount outstanding:
Federal funds borrowed		1,894,168			2,885,996			4,021,248
Security repurchase agreements		4,133,423			3,486,526			3,316,941
Weighted daily average interest rate:
Federal funds borrowed		5.18	%		5.08	%		3.34	%
Security repurchase agreements		4.22			3.96			2.28
Weighted daily interest rate for amounts outstanding at December 31:
Federal funds borrowed		3.58	%		5.09	%		4.06	%
Security repurchase agreements		3.54			4.40			3.05

As of December 31, 2007, federal funds borrowed and security repurchase agreements have maturities of one month or less.


15.	Borrowed Funds

Detail of borrowed funds follows:



	December 31

(In Thousands)	2007			2006


Commercial paper	$	1,170,581		$	811,842
U.S. Treasury notes		500,000			433,829
Other		384,482			403,296


Total borrowed funds	$	2,055,063		$	1,648,967


Weighted-average rate		4.30	%		4.96	%

Commercial paper is issued by the Corporation’s subsidiary, National City Credit Corporation. As of December 31, 2007, the entire balance had maturities of four months or less. U.S. Treasury notes represent secured borrowings from the U.S. Treasury. These borrowings are collateralized by qualifying securities and commercial loans. The funds are placed at the discretion of the U.S. Treasury. At December 31, 2007, the entire balance of outstanding U.S. Treasury notes was callable on demand by the U.S. Treasury.

The other category at December 31, 2007 and 2006, included liabilities totaling $337 million and $305 million, respectively, related to mortgage loans available for repurchase under GNMA and FNMA loan sale programs. See further discussion in Note 1. The other category also included obligations totaling $8 million and $52 million at December 31, 2007 and 2006, respectively, related to securities sold short, which are obligations to purchase securities that have already been sold to other third parties. Some short sales are held for trading purposes, while others are used to economically hedge risk associated with other assets or liabilities. See further discussion in Note 9.


16.	Long-Term Debt

The composition of long-term debt follows. This note excludes the junior subordinated notes owed to the unconsolidated subsidiary trusts. See Note 17 for further discussion on these obligations.



	December 31

(In Thousands)	2007		2006


3.20% senior notes due 2008	$	297,907	$	291,764
3.125% senior notes due 2009		194,489		190,898
5.75% subordinated notes due 2009		302,419		302,550
Variable-rate senior note due 2009		600,000		—
Variable-rate senior note due 2010		301,461		299,908
4.90% senior notes due 2015		395,564		389,674
6.875% subordinated notes due 2019		776,672		764,052
8.375% senior note redeemed 2007		—		69,960


Total holding company		2,868,512		2,308,806
Senior bank notes		13,061,382		18,580,239
Federal Home Loan Bank advances		6,256,186		1,998,923
7.25% subordinated notes due 2010		235,473		239,052
6.30% subordinated notes due 2011		212,955		208,065
7.25% subordinated notes due 2011		201,145		197,933
6.25% subordinated notes due 2011		307,131		310,214
6.20% subordinated notes due 2011		518,893		507,892
4.63% subordinated notes due 2013		295,041		295,326
5.25% subordinated notes due 2016		239,348		244,697
Variable-rate subordinated notes due 2016		249,615		249,486
Variable-rate subordinated notes due 2017		523,110		—
5.80% subordinated notes due 2017		442,651		—
4.25% subordinated notes due 2018		225,530		224,354
Repurchase agreements		320,911		—
Secured debt financings		25,911		31,067
Other		8,659		10,917


Total subsidiaries		23,123,941		23,098,165


Total long-term debt	$	25,992,453	$	25,406,971

The amounts above represent the par value of the debt adjusted for any unamortized discount, other basis adjustments related to hedging the debt with derivative instruments, and fair value adjustments recognized in connection with debt acquired through acquisitions. The Corporation uses derivative instruments, primarily interest-rate swaps and caps, to manage interest-rate risk on its long-term debt. Interest-rate swaps are used to hedge the fair value of certain fixed-rate debt by converting the debt to variable rate and are also used to hedge the cash flow variability associated with certain variable-rate debt by converting the debt to fixed rate. Interest-rate caps are also used to hedge cash flow variability by capping the interest payments associated with variable-rate debt issuances. Further discussion on derivative instruments is included in Notes 1 and 25.

The subordinated notes of the holding company and National City Bank qualify for Tier 2 capital under the regulatory capital requirements of the federal banking agencies. Further discussion on regulatory capital requirements is included in Note 18.

A summary of par values and weighted-average rates of long-term debt as of December 31, 2007, follows. The weighted-average effective rate includes the effects of derivative instruments used to manage interest-rate risk, amortization of discounts, and amortization of fair value adjustments associated with debt acquired through acquisitions.



			Weighted-Average			Weighted-Average
(Dollars in Thousands)	Par Value		Contractual Rate			Effective Rate


Senior bank notes	$	13,065,727		4.86	%		4.93	%
FHLB advances		6,237,781		4.89			5.17
Subordinated notes		4,425,000		5.95			5.68
Senior notes		1,800,000		4.48			4.61
Repurchase agreements		325,000		4.47			4.78
Secured debt financings		25,911		6.60			6.60
Other		8,659		6.20			6.20


Total long-term debt	$	25,888,078		5.02	%		5.01	%

National City Bank has issued senior and subordinated bank notes. During 2007, National City Bank issued senior bank notes with a par value of $2.1 billion and subordinated bank notes with par values totaling $950 million. At December 31, 2007, senior bank notes totaling $1.6 billion were contractually based on a fixed rate of interest and $11.5 billion were contractually based on a variable rate of interest. Senior bank notes have maturities ranging from 2008 to 2078. All but two subordinated notes of National City Bank were issued at fixed rates, pay interest semi-annually and may not be redeemed prior to maturity. The variable-rate subordinated note due 2016 is based on three-month LIBOR plus 35 basis points, resets quarterly, and was 5.341% at December 31, 2007. The variable-rate subordinated note due 2017 is based on three-month LIBOR plus 37 basis points, resets quarterly, and was 5.521% at December 31, 2007. National City acquired repurchase agreements as part of the MAF Bancorp acquisition, which at December 31, 2007, consisted of $100 million of fixed-rate obligations, $225 million of variable-rate obligations, and have maturities ranging from 2008 to 2014.

The holding company has issued both senior and subordinated notes. All but two of the notes issued by the holding company are fixed rate. The $600 million variable-rate senior note due 2009 was issued during the first quarter of 2007. The interest rate on this note is based on three-month LIBOR plus 1.5 basis points, is reset quarterly, and was 4.941% at December 31, 2007. The interest rate on the variable-rate senior note due 2010 is based on three-month LIBOR plus 17 basis points, is reset quarterly and was 5.161% at December 31, 2007. The 8.375% senior note of the holding company was called on July 15, 2007. All remaining senior notes and subordinated notes of the holding company pay interest semi-annually and may not be redeemed prior to maturity.

At December 31, 2007, Federal Home Loan Bank (FHLB) advances consisted of $2.1 billion of fixed-rate obligations and $4.1 million of variable-rate obligations. The Corporation’s maximum remaining borrowing limit with the FHLB was $3.1 billion at December 31, 2007. The Corporation pledged $16.2 billion in residential real estate loans, $7.0 billion in home equity lines of credit, and $55 million in mortgage-backed securities as collateral against FHLB borrowings at December 31, 2007. FHLB advances have maturities ranging from 2008 to 2030.

At December 31, 2007, long-term debt maturities, based on par values of such debt, were as follows: $9.5 billion in 2008, $5.7 billion in 2009, $3.5 billion in 2010, $1.4 billion in 2011, $1.2 billion in 2012, and $4.6 billion thereafter.

In January 2008, the holding company issued $1.4 billion of convertible senior notes. Interest on these notes will be paid semiannually at a fixed rate of 4.0%. The maturity date of these notes is February 1, 2011. The Corporation may not redeem these notes prior to their maturity date. Holders may convert their notes, at their option, prior to November 15, 2010 under certain circumstances, including (i) if the trading price of the notes is less than a defined threshold measured against the market value of National City common stock, (ii) any time after March 31, 2008, if the market price of National City common stock exceeds 130% of the conversion price of the notes in effect on the last trading day of the immediately preceding calendar quarter, or (iii) upon the occurrence of certain specific events. After

November 15, 2010, the holders may convert their notes at any time through the third scheduled trading date preceding the maturity date. The initial conversion rate will be equal to 52.8709 shares, which represented an initial conversion price of approximately $18.91, a 22.5% conversion premium to the last reported sale price of National City common stock on January 23, 2008. The conversion rate will be subject to adjustment for stock splits, stock dividends, cash dividends in excess of certain thresholds, stock repurchases where the price exceeds market values, and certain other events. Upon conversion, the Corporation will pay cash equal to the principal balance of the notes and may issue shares of its common stock for any conversion value, determined over a 40 day observation period, that exceeds the principal balance of the notes being converted. The maximum number of net common shares that the Corporation may be required to issue is 76 million shares, subject to potential adjustment in the case of certain events, make-whole fundamental changes, or early termination. The Corporation intends to use a portion of the net proceeds from this offering to repay $300 million of senior notes maturing in 2008, to pay the net cost of a related hedged transaction, and for general corporate purposes.

The holders of the convertible senior notes may elect: i) in the case of a make-whole fundamental change, to convert the notes prior to the effective time of such change, in which case the conversion rate will be increased as provided by a formula set forth in the indenture supplement governing the convertible senior notes; or ii) upon the effective time of any fundamental change, to require the Corporation to repurchase the convertible senior notes at their principal amount plus accrued but unpaid interest.

Generally, a fundamental change includes an acquisition of more than 50% of National City’s common stock, certain mergers, consolidations or other business combinations, if the Corporation’s continuing directors are less than the majority of the Board of Directors, a liquidation or dissolution, or National City’s common stock is not listed on any U.S. national securities exchange. These rights may discourage a business combination or other transaction that is favored by certain of our shareholders.

In conjunction with this offering, the Corporation entered into a convertible note hedge and warrant transactions which are intended to offset the potential share dilution upon conversion of the notes. For more description on the hedge transaction refer to Note 22 of the Consolidated Financial Statements.


17.	Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Debentures of the Corporation

As of December 31, 2007, National City sponsored seven trusts, of which 100% of the common equity is owned by the Corporation, formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the capital securities) to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Corporation (the debentures). The debentures held by each trust are the sole assets of that trust which issued common securities to the Corporation and preferred capital securities to third-party investors. The capital securities of these trusts qualify as Tier I capital of the Corporation for regulatory purposes. On May 25, 2007 and August 30, 2007, the Corporation issued $500 million and $518 million of junior subordinated debentures, respectively.

The $500 million junior subordinated debentures owed to National City Capital Trust III bear interest at a fixed rate of 6.625%, payable quarterly in arrears. These debentures are redeemable at par plus accrued unpaid interest, in whole or in part, anytime after May 25, 2012, with the prior approval of the Federal Reserve Board. The $500 million junior subordinated debentures have a scheduled maturity date of May 25, 2047. Upon the scheduled maturity date, the Corporation will be required to refinance these debentures with securities that are treated as capital for regulatory purposes. If the Corporation is unable to refinance these securities, they will remain outstanding until their legal maturity date of May 25, 2067, and bear interest at a variable rate equal to one-month LIBOR plus 2.1263 basis points. These debentures rank pari-passu to the Corporation’s other junior subordinated debentures issued to National City Capital Trust II and IV, junior to the Corporation’s outstanding debt, and junior to its other outstanding junior subordinated debentures.

The $518 million junior subordinated debentures owed to National City Capital Trust IV bear interest at a fixed rate of 8.0%, payable quarterly in arrears. These debentures are redeemable at par plus accrued unpaid interest, in whole or in part, anytime after August 30, 2012, with the prior approval of the Federal Reserve Board. These debentures have a scheduled maturity date of September 15, 2047. Upon the scheduled maturity date, the Corporation will be required to refinance these debentures with securities that are treated as capital for regulatory purposes. If the Corporation is unable to refinance these securities, they will remain outstanding until their legal maturity date of August 30, 2067 and bear interest at a variable rate equal to one-month LIBOR plus 3.487 basis points. These debentures rank pari-passu to the Corporation’s junior subordinated debentures issued to National City Capital Trust II and III, junior to the Corporation’s outstanding debt, and junior to its other outstanding junior subordinated debentures.

Consolidated debt obligations related to subsidiary trusts holding solely debentures of the Corporation follow. These amounts represent the par value of the obligations owed to the subsidiary trusts, including the Corporation’s ownership interest in the trusts, plus basis adjustments related to hedging the obligations with derivative instruments and fair value adjustments recognized in connection with obligations acquired through acquisitions.



	December 31

(In Thousands)	2007		2006


6.625% junior subordinated debentures owed to National City Capital Trust II due November 15, 2036	$	753,947	$	752,681
6.625% junior subordinated debentures owed to National City Capital Trust III due May 25, 2047		499,017		—
8.000% junior subordinated debentures owed to National City Capital Trust IV due September 15, 2047		520,697		—
Variable-rate junior subordinated debentures owed to MAF Bancorp Capital Trust II due September 15, 2035		38,065		—
Variable-rate junior subordinated debentures owed to MAF Bancorp Capital Trust I due June 15, 2035		32,609		—
Variable-rate junior subordinated debentures owed to Fidelity Capital Trust III due November 23, 2034		32,010		—
Variable-rate junior subordinated debentures owed to Fidelity Capital Trust II due January 23, 2034		23,338		—
8.12% junior subordinated debentures owed to First of America Capital Trust I redeemed January 31, 2007		—		154,640
9.85% junior subordinated debentures owed to Fort Wayne Capital Trust I redeemed April 15, 2007		—		30,928
Variable-rate junior subordinated debentures owed to Banc Services Corp. Statutory Trust I redeemed June 26, 2007		—		7,317
Variable-rate junior subordinated debentures owed to Forbes First Financial Statutory Trust I redeemed June 26, 2007		—		3,139


Total junior subordinated debentures owed to unconsolidated subsidiary trusts	$	1,899,683	$	948,705

Distributions on the capital securities issued by National City Capital Trust II, III and IV are payable quarterly at a rate per annum equal to the interest rate being earned by the trust on the debentures held by these trusts. Distributions on the capital securities issued by Fidelity Capital Trust III are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 197 basis points, with no maximum interest rate. The interest rate associated with Fidelity Capital Trust III was 6.99% at December 31, 2007. Distributions on the capital securities issued by Fidelity Capital Trust II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 285 basis points, with no maximum interest rate. The interest rate associated with Fidelity Capital Trust II was 7.83% at December 31, 2007. Distributions on the capital securities issued by MAF Bancorp Capital Trust I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 175 basis points, with no maximum interest rate. The interest rate associated with MAF Bancorp Capital Trust I was 6.74% at December 31, 2007. Distributions on the capital securities issued by MAF Bancorp Capital Trust II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 140 basis

points, with no maximum interest rate. The interest rate associated with MAF Bancorp Capital Trust II was 6.39% at December 31, 2007.

The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by the trusts are first redeemable, in whole or in part, by the Corporation as follows:



	First Call Date


Fidelity Capital Trust II		January 23, 2009
Fidelity Capital Trust III		November 23, 2009
MAF Capital Bancorp Trust I		June 15, 2010
MAF Capital Bancorp Trust II		September 15, 2010
National City Capital Trust II		November 15, 2011
National City Capital Trust III		May 25, 2012
National City Capital Trust IV		August 30, 2012

In January 2008, the Corporation issued $500 million of junior subordinated debentures to National City Preferred Capital Trust I. These junior subordinated debentures bear interest at a fixed rate of 8.729%, payable semi-annually in arrears. These debentures are redeemable at par plus accrued unpaid interest, in whole or in part, anytime after December 10, 2016, with the prior approval of the Federal Reserve Board. These debentures have a scheduled maturity date of December 10, 2043. These debentures are eligible to be remarketed one month prior to December 10, 2012 at which time the interest rate, call date, and maturity may be reset. These debentures rank pari-passu to the Corporation’s junior subordinated debentures issued to National City Capital II, III and IV, junior to the Corporation’s outstanding debt, and junior to its other outstanding junior subordinated debentures.

The Corporation may only redeem or repurchase its junior subordinated notes payable owed to National City Capital Trust II, III and IV more than 10 years in advance of their legal maturity dates, subject to certain limitations. The Corporation may only redeem or repurchase its junior subordinated notes payable owed to National City Preferred Capital Trust I prior to December 10, 2016, subject to certain limitations. Prior to the date of that redemption or repurchase, the Corporation must have received proceeds from the issuance of equity or hybrid securities that qualify as Tier 1 capital under the Federal Reserve’s capital guidelines. The Corporation will also be required to obtain approval of the Federal Reserve prior to the issuance of such securities. The current beneficiaries of this limitation are the holders of the Corporation’s 6.875% subordinated notes due 2019.


18.	Regulatory Restrictions and Capital Ratios

The Corporation and its bank subsidiaries, National City Bank and MidAmerica Bank, are subject to various regulatory capital requirements of federal regulatory agencies that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that could have a material effect on financial position and operations.

Regulatory and other capital measures follow:



	2007					2006

(Dollars in Thousands)	Amount		Ratio			Amount		Ratio


Total equity/assets	$	13,407,828		8.92	%	$	14,581,003		10.40	%
Total common equity/assets		13,407,828		8.92			14,581,003		10.40
Tangible common equity/tangible assets		7,628,098		5.28			10,581,444		7.77
Tier 1 capital		9,366,935		6.53			11,534,600		8.93
Total risk-based capital		14,728,763		10.27			15,704,502		12.16
Leverage		9,366,935		6.39			11,534,600		8.56

The tangible common equity ratio excludes goodwill and other intangible assets from both the numerator and denominator.

Tier 1 capital consists of total equity plus qualifying capital securities and minority interests, less unrealized gains and losses accumulated in other comprehensive income, certain intangible assets, and adjustments related to the valuation of servicing assets and certain equity investments in nonfinancial companies (principal investments).

Total risk-based capital is comprised of Tier 1 capital plus qualifying subordinated debt and allowance for loan losses and a portion of unrealized gains on certain equity securities.

Both the Tier 1 and the total risk-based capital ratios are computed by dividing the respective capital amounts by risk-weighted assets, as defined.

The leverage ratio reflects Tier 1 capital divided by average total assets for the period. Average assets used in the calculation exclude certain intangible and servicing assets.

National City Corporation’s Tier 1, total risk-based capital, and leverage ratios for the current period are above the required minimum levels of 4.00%, 8.00%, and 3.00%, respectively. The capital levels at National City Bank and MidAmerica Bank are maintained at or above the well-capitalized minimums of 6.00%, 10.00%, and 5.00% for the Tier 1 capital, total risk-based capital, and leverage ratios, respectively, as defined under the regulatory framework for prompt corrective action.

National City Bank and MidAmerica Bank from time to time are required to maintain noninterest bearing reserve balances with the Federal Reserve Bank. The required reserve balance was $19 million at December 31, 2007.

Under current Federal Reserve regulations, a bank subsidiary is limited in the amount it may loan to its parent company and nonbank subsidiaries. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of the bank’s capital stock, surplus and undivided profits, plus the allowance for loan losses. Loans from the subsidiary bank to nonbank affiliates, including the parent company, are also required to be collateralized.

Dividends paid by subsidiary banks to its parent company are also subject to certain legal and regulatory limitations. In 2008, subsidiary banks may pay dividends up to and equal to their net income for 2008, as defined by statute, through the date of any such dividend declaration, without prior regulatory approval.

Dividends paid by the Corporation are also subject to certain legal restrictions and regulatory guidance.

The Corporation’s mortgage banking and broker/dealer subsidiaries are also required to maintain minimum net worth capital requirements with various governmental agencies. The mortgage banking subsidiaries’ net worth requirements are governed by the Department of Housing and Urban Development and the Government National Mortgage Association. The broker/dealer’s net worth requirements are governed by the United States Securities and Exchange Commission. As of December 31, 2007, these subsidiaries met their respective minimum net worth capital requirements.


19.	Stockholders’ Equity

Common Stock Warrant: In January 2008, in conjunction with the issuance of convertible senior notes, common stock warrants were issued to a third party. The holder has the option to exercise 844,465 warrants, on a daily basis, commencing June 15, 2011 and ending on July 15, 2011, and 844,466 warrants, on a daily basis, commencing July 18, 2011 and ending on October 20, 2011. The strike price of these warrants is $27.79 per share, which represented an 80% premium to the last reported sale price of $15.44 per share of National City common stock on January 23, 2008. Upon exercise, the Corporation will deliver common shares with a market value equal to the number of warrants exercised multiplied by the excess of the market price of National City common stock over the strike price. The maximum number of shares that could be required to be issued is approximately 76 million, subject to adjustment in the case of certain events, make-whole fundamental changes or early termination. The Corporation has reserved 93.1 million shares for issuance pursuant to the convertible notes and warrants.

Preferred Stock: The Corporation issued 70,272 shares of no par, Series D convertible non-voting preferred stock in conjunction with a 2004 acquisition. Each share of Series D preferred stock is convertible at any time by the holder into 15.96 shares of National City common stock. The conversion rate is subject to adjustment in the event the Corporation takes certain actions such as paying a dividend in stock, splitting its common stock, or combining its common stock into a smaller number of shares. Common shares deliverable upon conversion of the preferred stock have been reserved for future issuance. The Corporation has no right to redeem the preferred stock. Dividends are paid on the preferred stock as dividends are paid on common stock at the dividend rate per common share multiplied by the preferred stock conversion ratio. The Series D preferred stock shall be preferred over National City common stock in the event of liquidation or dissolution of the Corporation. In such event, the preferred holders will be entitled to receive $100 per share, or $7 million, plus accrued and unpaid dividends.

In January 2008, the Corporation designated 5,751 shares as no par, Series E perpetual preferred stock, of which 5,001 of these shares would be issued pursuant to a stock purchase contract with National City Preferred Capital Trust I. The stock purchase date is expected to be December 10, 2012, but could occur earlier or later, under certain conditions. In January 2008, the Corporation also designated 1,725 shares as no par, Series F preferred stock, of which 1,500 of these shares were issued. Both the Series E and F preferred stock will rank senior to National City common stock and on parity with the Series D preferred stock in the event of liquidation or dissolution of the Corporation. Both the Series E and F preferred stock have a liquidation value of $100,000 per share. Both series are noncumulative with respect to dividends and will have limited voting rights in the event of nonpayment of dividends and certain other events. Holders of this preferred stock will be entitled to receive dividends, when and as declared by the Board of Directors. Series E shall be redeemable at the Corporation’s option, and subject to Federal Reserve approval, at any date after December 10, 2012. Series F shall be redeemable at the Corporation’s option, subject to Federal Reserve approval, at any date after February 1, 2013. Subject to these conditions, both Series E and F may be redeemed for $100,000 per share plus any declared but unpaid dividends. The Corporation will be limited in its right to redeem both Series E and F prior to ten years after their initial issuance dates by a replacement capital covenant. Pursuant to this covenant, the Corporation must have received proceeds from the issuance of equity or hybrid securities that qualify as Tier I capital and may be required to obtain the approval of the Federal Reserve The current beneficiary of this limitation are the holders of the Corporation’s 6.875% subordinated notes due 2019.

Common Stock Repurchases: On April 24, 2007, the Corporation’s Board of Directors authorized the repurchase of up to 40 million shares of National City common stock subject to an aggregate purchase limit of $1.6 billion. This authorization, which has no expiration date, was incremental to all previous authorizations approved by the Board of Directors. Repurchased shares are held for reissue in connection with compensation plans and for general corporate purposes. During 2007, 2006, and 2005, the Corporation repurchased 45.9 million, 20.1 million, and 43.5 million shares, respectively under those authorizations. As of December 31, 2007, 37.6 million shares remain authorized for repurchase.

On January 25, 2007, the Corporation’s Board of Directors authorized a “modified Dutch auction” tender offer to purchase up to 75 million shares of its outstanding common stock, at a price range not greater than $38.75 per share nor less than $35.00 per share, for a maximum aggregate repurchase price of $2.9 billion. On March 7, 2007, the

Corporation accepted for purchase 40.3 million shares of its common stock at $38.75 per share for an aggregate price of $1.6 billion. The share repurchase authorizations described above were unaffected by the tender offer.

Preferred Securities of Subsidiaries: PFGI Capital Corporation (PFGI Capital) is a consolidated subsidiary of the Corporation associated with a 2004 acquisition. The purpose of PFGI Capital is to invest in commercial mortgage loans and other authorized investments acquired from the Corporation to generate net income for distribution to its stockholders. PFGI Capital has elected to be treated as a real estate investment trust (REIT) for federal income tax purposes. Upon its formation, PFGI Capital issued 6.6 million equity units (PRIDES) to outside investors. The ownership by outside investors is accounted for as a minority interest in the Consolidated Financial Statements. Each PRIDES was comprised of two components – a three-year forward purchase contract and PFGI Capital Series A Preferred Stock. During 2005, all PRIDES holders exercised their Forward Purchase Contracts which entitled them to purchase 6,444,223 newly issued shares of National City common stock for $165 million.

Other Comprehensive Income: A summary of activity in accumulated other comprehensive income follows:



	For the Calendar Year

(In Thousands)	2007			2006			2005


Accumulated unrealized gains (losses) on securities available for sale at January 1, net of tax	$	3,938		$	(4,018	)	$	107,193
Net unrealized gains (losses) for the period, net of tax expense (benefit) of $13,341 in 2007, $4,115 in 2006, and $(49,316) in 2005		24,776			7,642			(91,586	)
Reclassification adjustment for (gains) losses included in net income net of tax expense (benefit) of $7,636 in 2007, $(169) in 2006, and $7,463 in 2005		(14,180	)		314			(19,625	)


Effect on other comprehensive income for the period		10,596			7,956			(111,211	)


Accumulated unrealized gains (losses) on securities available for sale at December 31, net of tax	$	14,534		$	3,938		$	(4,018	)


Accumulated unrealized (losses) gains on derivatives used in cash flow hedging relationships at January 1, net of tax	$	(3,505	)	$	15,883		$	(6,605	)
Net unrealized gains for the period, net of tax expense of $39,452 in 2007, $4,227 in 2006, and $16,849 in 2005		73,268			7,850			31,291
Reclassification adjustment for losses (gains) included in net income, net of tax (benefit) expense of $(69) in 2007, $14,666 in 2006, and $4,740 in 2005		128			(27,238	)		(8,803	)


Effect on other comprehensive income for the period		73,396			(19,388	)		22,488


Accumulated unrealized gains (losses) on derivatives used in cash flow hedging relationships at December 31, net of tax	$	69,891		$	(3,505	)	$	15,883


Accumulated unrealized losses for pension and other postretirement obligations at January 1, net of tax	$	(71,347	)	$	—		$	—
Net unrealized losses of prior service costs for the period, net of tax benefit of $2,854		(4,859	)		—			—
Net unrealized gains for the period, net of tax expense of $48,710		82,938			—			—
Amortization of prior service costs included in net periodic benefit, net of tax benefit of $1,319 in 2007		(2,300	)		—			—
Amortization of transition obligation included in net periodic benefit, net of tax expense of $295 in 2007		514			—			—
Amortization of net loss included in net periodic benefit, net of tax expense of $1,257 in 2007		2,193			—			—


Effect on other comprehensive income for the period		78,486			—			—


Prior service costs, net of tax expense of $5,974 in 2006		—			10,506			—
Transition obligation, net of tax benefit of $1,210 in 2006		—			(2,128	)		—
Net loss, net of tax benefit of $45,333 in 2006		—			(79,725	)		—


Cumulative effect of change in accounting for pensions and other postretirement liabilities		—			(71,347	)		—


Accumulated unrealized gains (losses) for pension and other postretirement obligations at December 31, net of tax	$	7,139		$	(71,347	)	$	—


Accumulated other comprehensive (loss) income at January 1, net of tax	$	(70,914	)	$	11,865		$	100,588
Other comprehensive income (loss), net of tax		162,478			(11,432	)		(88,723	)
Cumulative effect of change in accounting for pensions and other postretirement liabilities		—			(71,347	)		—


Accumulated other comprehensive income (loss) at December 31, net of tax	$	91,564		$	(70,914	)	$	11,865


20.	Net Income Per Common Share

Calculations of basic and diluted net income per share follow:



	For the Calendar Year

(Dollars in Thousands, Except Per Share Amounts)	2007		2006		2005


Basic
Net income	$	313,975	$	2,299,836	$	1,985,229
Less preferred dividends		1,794		1,704		1,616


Net income applicable to common stock	$	312,181	$	2,298,132	$	1,983,613


Average common shares outstanding		607,106,057		609,395,710		633,431,660
Less average unallocated ESOP shares		717,291		79,640		—


Average common shares outstanding – basic		606,388,766		609,316,070		633,431,660


Net income per common share – basic	$	.51	$	3.77	$	3.13


Diluted
Net income	$	313,975	$	2,299,836	$	1,985,229


Average common shares outstanding – basic		606,388,766		609,316,070		633,431,660
Stock awards		4,726,352		7,233,896		6,679,651
Convertible preferred stock		1,121,541		1,121,541		1,121,541
Forward contracts		—		—		368,117


Average common shares outstanding – diluted		612,236,659		617,671,507		641,600,969


Net income per common share – diluted	$	.51	$	3.72	$	3.09

Basic net income per common share is calculated by dividing net income, less dividend requirements on convertible preferred stock, by the weighted-average number of common shares outstanding, less unallocated Employee Stock Ownership Plan (ESOP) shares, for the period.

Diluted net income per common share takes into consideration the pro forma dilution of outstanding convertible preferred stock and certain unvested restricted stock and unexercised stock option awards. In 2005, diluted common shares outstanding also considered commitments to issue additional shares pursuant to forward contracts, which were exercised in full in 2005. For the years ended December 31, 2007, 2006, and 2005, options to purchase 18.7 million, 5.4 million, and 10.4 million shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect. Diluted net income is not adjusted for preferred dividend requirements since preferred shares are assumed to be converted from the beginning of the period.

In January 2008, the Corporation issued convertible senior notes, as well as common stock warrants and entered into a covered spread hedge transaction. Upon conversion of the notes, the Corporation may be required to issue common shares. If the common stock price exceeds $18.91 per share, the impact would be dilutive to earnings per share. The Corporation has hedged the dilutive impact of this transaction. The common stock warrants were issued to a third party at a strike price of $27.79 per share, which represents an 80% premium to the last reported sale price of $15.44 per share of National City’s common stock on January 23, 2008. These warrants are exercisable beginning June 15, 2011 and expire October 20, 2011. These warrants would be dilutive to earnings per share in future periods if the market price of National City common stock were to exceed the warrant’s strike price. The maximum number of net shares that can be issued pursuant to the warrants and the convertible senior notes is 76 million, subject to adjustment.


21.	Income Taxes

The composition of income tax expense follows:



	For the Calendar Year

(In Thousands)	2007			2006			2005


Current:
Federal	$	428,881		$	1,031,632		$	617,351
State		33,224			51,416			14,425


Total current		462,105			1,083,048			631,776
Deferred:
Federal		(362,375	)		43,402			341,551
State		(43,028	)		(3,650	)		6,860


Total deferred		(405,403	)		39,752			348,411


Income tax expense	$	56,702		$	1,122,800		$	980,187


Income tax expense applicable to securities transactions	$	7,636		$	(169	)	$	7,493

The effective tax rate differs from the statutory Federal tax rate applicable to corporations as a result of permanent differences between accounting and taxable income as shown in the following table:



	For the Calendar Year

	2007			2006			2005


Statutory Federal tax rate		35.0	%		35.0	%		35.0	%
Life insurance		(7.9	)		(0.8	)		(0.9	)
Tax-exempt income		(4.5	)		(0.5	)		(0.7	)
State taxes		(1.6	)		0.9			0.5
Tax credits		(18.7	)		(1.5	)		(1.7	)
Goodwill impairment		12.2			—			—
Other		0.8			(0.3	)		0.9


Effective tax rate		15.3	%		32.8	%		33.1	%

Significant components of deferred tax liabilities and assets as of December 31 follow:



(In Thousands)	2007			2006


Deferred tax liabilities:
Mortgage servicing rights	$	818,592		$	641,499
Leases and equipment leased to others		352,789			456,309
Properties and equipment		107,680			58,881
Deferred loan fees		72,975			94,868
Unrealized gains on securities & loans available or held for sale		31,270			3,098
State income taxes		—			20,113
Intangibles		113,330			63,288
Other, net		104,415			99,248


Total deferred tax liabilities		1,601,051			1,437,304
Deferred tax assets:
Allowance for loan losses		723,009			448,015
Deferred compensation accrual		116,050			115,256
Repurchase and indemnification reserves		191,586			62,620
Employee benefit accruals		87,832			89,092
State income taxes		22,702			—
Retained interests		14,516			19,273
Net operating loss carryforwards		10,578			9,741
Other, net		207,327			145,200


Gross deferred tax assets		1,373,600			889,197
Less: valuation allowance		(9,735	)		(4,992	)


Total deferred tax assets, net		1,363,865			884,205


Net deferred tax liability	$	237,186		$	553,099

A federal net operating loss carryforward of less than $1 million remaining at December 31, 2007 was acquired in connection with the acquisition of Forbes, Harbor and Fidelity. This carryforward expires in 2023. Management believes that future taxable income will be sufficient to fully realize the deferred tax asset associated with this carryforward. The valuation allowance shown above relates to state net operating loss carryforwards which may not be realized in future periods.

Retained earnings at December 31, 2007 includes $117 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current law, if certain subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to Federal income tax at the current corporate tax rate.

For the years ended 2007, 2006, and 2005, income tax benefits of $21 million, $18 million, and $19 million, respectively, were credited to stockholders’ equity related to the exercise of nonqualified employee stock options.

The Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the adoption of this new accounting standard, the Corporation recorded a $31 million increase in its liability for uncertain tax positions and related interest ($24 million net of tax), which was accounted for as a cumulative effect of an accounting change, reducing the opening balance of retained earnings. As of December 31, 2007 and 2006, the Corporation had a liability for uncertain tax positions, excluding interest and penalties, of $209 million and $184 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:



(In Thousands)	2007


Balance at January 1, 2007	$	184,107
Additions:
Positions taken during the current year		1,712
Positions taken during a prior period		25,612
Obtained in acquisitions		11,480
Translation adjustments		107
Reductions:
Positions taken during the current year		(345	)
Positions taken during a prior period		(7,995	)
Decreases related to settlements with taxing authorities		(723	)
Reductions resulting from lapse of statutes of limitation		(4,951	)


Balance at December 31, 2007	$	209,004

The Corporation recognizes interest and penalties associated with uncertain tax positions in income tax expense. During 2007, 2006, and 2005, the provision for interest and penalties was $22 million, $4 million, and $4 million, respectively. The Corporation had approximately $58 million and $31 million accrued for payment of interest and penalties as of December 31, 2007 and 2006, respectively.


22.	Commitments, Contingent Liabilities, Guarantees, and Related Party Transactions

Commitments: A summary of the contractual amount of significant commitments follows:



	December 31

(In thousands)	2007		2006


Commitments to extend credit:
Revolving home equity and credit card lines	$	35,803,302	$	34,286,346
Commercial		28,231,694		24,851,485
Residential real estate		7,218,115		9,506,648
Other		607,390		1,047,439
Standby letters of credit		5,371,844		5,265,929
Commercial letters of credit		326,607		338,110
Net commitments to sell mortgage loans and mortgage-backed securities		2,500,026		3,480,387
Net commitments to sell commercial real estate loans		625,949		376,375
Commitments to fund civic and community investments		717,400		607,190
Commitments to fund principal investments		357,101		282,407
Commitments to purchase beneficial interests in securitized automobile loans		283,012		573,152

Commitments to extend credit are agreements to lend. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Certain lending commitments for residential mortgage and commercial real estate loans to be sold into the secondary market are considered derivative instruments in accordance with SFAS 133. The changes in the fair value of these commitments due to changes in interest rates are recorded on the balance sheet as either derivative assets or derivative liabilities. The commitments related to residential mortgage loans and commercial real estate loans are included in residential real estate and commercial loans, respectively, in the above table. Further discussion on derivative instruments is included in Notes 1 and 25.

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. The credit risk associated with loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s credit assessment of the customer.

The Corporation enters into forward contracts for the future delivery or purchase of fixed-rate residential mortgage loans, mortgage-backed securities, and commercial real estate loans to reduce the interest-rate risk associated with loans held for sale, commitments to fund loans, and mortgage servicing rights. These contracts are also considered derivative instruments under SFAS 133, and the fair value of these contracts are recorded on the balance sheet as either derivative assets or derivative liabilities. Further discussion on derivative instruments is included in Notes 1 and 25.

The Corporation invests in low-income housing, small-business commercial real estate, and historic tax credit projects to promote the revitalization of low- to moderate-income neighborhoods throughout the local communities of its banking subsidiary. As a limited partner in these unconsolidated projects, the Corporation is allocated tax credits and deductions. The commitments to fund civic and community investments represent funds committed for existing and future projects.

The Corporation has principal investment commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, over which privately held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate.

National City Bank, a subsidiary of the Corporation, along with other financial institutions, has agreed to provide backup liquidity to a third-party commercial paper conduit. The conduit holds various third-party assets including beneficial interests in the cash flows of trade receivables, credit cards and other financial assets, as well as automobile loans securitized by the Corporation. The conduit has no interests in subprime mortgage loans. The Corporation has retained interests in the securitized automobile loans in the form of Class A notes, Class B notes, and an interest-only strip. As of December 31, 2007, the fair value of these retained interests was $28 million. The conduit relies upon commercial paper for its funding. In the event of a disruption in the commercial paper markets, the conduit could experience a liquidity event. At such time, the conduit may require National City Bank to purchase a 49% interest in a note representing a beneficial interest in the Corporation’s securitized automobile loans. Another financial institution, affiliated with the conduit, has committed to purchase the remaining 51% interest in this same note. Upon the conduit’s request, National City Bank would pay cash equal to the par value of the notes, less the corresponding portion of all defaulted loans, plus accrued interest. In return, National City Bank would be entitled to undivided interest in the cash flows of the collateral underlying the note. The Corporation receives an annual commitment fee of 7 basis points for providing this backup liquidity. To date, the conduit has not experienced any difficulty in accessing the commercial paper markets. The Corporation’s commitment declines commensurate with the unpaid principal balance of the automobile loans securitized by the Corporation. As of December 31, 2007, the Corporation’s maximum commitment was $283 million. This commitment expires in December 2008 but may be renewed annually for an additional 12 months by mutual agreement of the parties.

The Corporation and certain of its subsidiaries occupy certain facilities under long-term operating leases and, in addition, leases certain software and data processing and other equipment. The aggregate minimum annual rental commitments under these leases total approximately $174 million in 2008, $144 million in 2009, $122 million in 2010, $110 million in 2011, $101 million in 2012, and $603 million thereafter. The Corporation also subleases and receives rental income on certain leased properties. As of December 31, 2007, aggregate future minimum rentals to be received under noncancelable subleases totaled $17 million. Total operating lease expense, net of sublease income, recorded under all operating leases was $159 million, $163 million, and $179 million in 2007, 2006, and 2005, respectively.

In January 2008, in conjunction with the issuance of junior subordinated notes, the Corporation issued a stock purchase contract to the unconsolidated subsidiary trust which holds these notes. Pursuant to this contract, the Corporation is committed to make contractual payments to the trust at a rate of 3.271% applied to the stated value of the stock purchase contracts of $500 million. This commitment expires when the stock purchase contracts are exercised which is expected to be December 10, 2012, but could be earlier or later based on certain conditions.

In January 2008, in conjunction with the issuance of convertible senior notes, the Corporation entered into a hedge transaction designed to reduce the potential dilutive impact of issuing common shares upon conversion of these notes. Pursuant to this contract, the Corporation has entered into a call option to purchase National City common shares from the hedge counterparty. The number of shares to be delivered, the strike price, and the settlement dates all correspond with conversion terms of the convertible senior notes. The maximum number of common shares that could be purchased under this contract is 76 million, subject to adjustment in the same manner as the conversion rate associated with the convertible notes. This contract will be physically settled by the counterparty delivering shares and the Corporation delivering cash. It expires upon the earlier of the last day that the convertible senior notes are outstanding, or three days prior to the maturity of these notes. At the same time, the Corporation entered into a warrant to sell up to 76 million shares of its common stock to a counterparty.

Contingent Liabilities and Guarantees: The Corporation has entered into agreements to sell residential mortgage loans and home equity lines of credit (collectively, loans) in the normal course of business. These agreements usually require certain representations concerning credit information, loan documentation, collateral, and insurability. On a regular basis, investors request the Corporation to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. Upon completion of its own investigation, the Corporation generally repurchases or provides indemnification on such loans. Indemnification requests are generally received within two years subsequent to the date of sale.

Management maintains a liability for estimated losses on loans expected to be repurchased or on which indemnification is expected to be provided and regularly evaluates the adequacy of this recourse liability based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loans, and current economic conditions. In connection with the sale of the First Franklin origination and sales platform, the Corporation transferred its recourse obligation associated with this unit to the buyer. At December 31, 2007 and 2006, the liability for estimated losses on repurchase and indemnification was $212 million and $171 million, respectively, and was included in other liabilities on the balance sheet. Further details on loans sold subject to indemnification provisions, loans repurchased or indemnified, and losses charged against the liability follow:



	For the Calendar Year

(In Millions)	2007		2006^(a)		2005^(b)


Total loans sold	$	47,524	$	70,897	$	72,134
Total loans repurchased or indemnified		563		479		331
Losses incurred		140		115		90


(a)		Included $25.6 billion of loans sold, $260 million of loans repurchased or indemnified, and $59 million of losses incurred related to the First Franklin unit.

(b)		Included $20.8 billion of loans sold, $61 million of loans repurchased or indemnified, and $29 million of losses incurred related to the First Franklin unit.

At December 31, 2007, the outstanding balances of residential real estate loans sold that the Corporation has indemnified or remain uninsured totaled $563 million and $72 million, respectively. The volume and balance of uninsured government loans may be affected by processing or notification delays. Management believes the majority of the uninsured loans will become insured during the normal course of business. To the extent insurance is not obtained, the loans may be subject to repurchase. Uninsured government loans which were ultimately repurchased have been included in the repurchase totals above.

On December 30, 2006, the Corporation completed the sale of the First Franklin nonprime mortgage origination and servicing platform. The proceeds received from this transaction were based on a preliminary statement of net assets

sold. The purchase price is subject to adjustment based on the closing date values of net assets sold, as well as other negotiated matters. Accordingly, the Corporation may either pay or receive additional consideration depending on the final outcome of this matter. The amount of the purchase price adjustment, if any, will decrease or increase the gain recognized on the sale of this unit. On April 13, 2007, the Corporation received a dispute notice from Merrill Lynch Bank & Trust Co., FSB, the buyer of First Franklin, which asserted that the closing date net asset values and related purchase price were overstated by $67 million. National City management does not agree with that assertion. If the parties cannot reach agreement on this dispute, this matter would be subject to arbitration.

The Corporation has a wholly owned captive insurance subsidiary which provides reinsurance to third-party insurers who provide lender paid mortgage insurance on approximately $1.4 billion of the Corporation’s nonprime second mortgage loans and lines. These arrangements are quota share reinsurance contracts whereby the captive insurance subsidiary is entitled to 50% of the primary policy premiums and assumes 50% of the risk of loss under the lender-paid mortgage insurance primary policy, which limits losses to 10% of the original insured risk per policy year. Loss reserves are provided for the estimated costs of settling reinsurance claims on defaulted loans. Loss reserves are established for reported claims as well as incurred but not reported claims. Management establishes loss reserves using historical experience and by making various assumptions and estimates of trends in loss severity, frequency, and other factors. The methods used to develop these reserves are subject to continual review and refinement, and any adjustments to these reserves are reflected in current period operations as identified. As of December 31, 2007 and 2006, reinsurance loss reserves of $21 million and $60 million, respectively, were included within the allowance for loan losses. The provision for reinsurance losses of $48 million in 2007 and $79 million in 2006 is included in the provision for loan losses in the Consolidated Financial Statements. In segment reporting, the provision for reinsurance losses is included within Retail Banking’s results as noninterest expense. As of December 31, 2007, the Corporation had no remaining exposure to additional reinsurance losses related to nonprime second mortgage loans and lines as the policy limit has been reached.

Red Mortgage Capital, a wholly owned subsidiary, is an approved Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage lender. Under the Fannie Mae DUS program, Red Mortgage Capital underwrites, funds, and sells mortgage loans on multifamily rental projects. Red Mortgage Capital then services these mortgage loans on Fannie Mae’s behalf. Participation in the Fannie Mae DUS program requires Red Mortgage Capital to share the risk of loan losses with Fannie Mae. Under the loss-sharing arrangement, Red Mortgage Capital and Fannie Mae split losses with one-third assumed by Red Mortgage Capital and two-thirds assumed by Fannie Mae. The Corporation provides a guarantee to Fannie Mae that it would fulfill all payments required of Red Mortgage Capital under the loss sharing arrangement if Red Mortgage Capital fails to meet its obligations. The maximum potential amount of undiscounted future payments that may be required under this program is equal to approximately one-third of the principal balance of the loans outstanding at December 31, 2007. If payment is required under this program, Red Mortgage Capital would have an interest in the collateral underlying the commercial mortgage loan on which the loss occurred. As of December 31, 2007 and 2006, Red Mortgage Capital serviced loans, subject to risk sharing under the DUS program, had outstanding principal balances aggregating $5.2 billion and $4.9 billion, respectively. This guarantee will continue until such time as the loss sharing agreement is amended or Red Mortgage Capital no longer shares the risk of losses with Fannie Mae. The fair value of the guarantee, in the form of reserves for losses under the Fannie Mae DUS program, is recorded in accrued expenses and other liabilities on the balance sheet and totaled $5 million at both December 31, 2007 and 2006.

The guarantee liability for standby letters of credit was $34 million and $39 million at December 31, 2007 and 2006, respectively. This liability was recorded in other liabilities on the balance sheet. See above for further discussion on standby letters of credit and their associated outstanding commitments.

The Corporation is subject to nonincome taxes in the various jurisdictions where it does business. The most significant of these taxes is franchise tax which is assessed by some states in lieu of or in addition to income taxes. The amount of tax due may be subject to different interpretations by the Corporation and the taxing authorities. In preparing the Corporation’s tax returns, management attempts to make reasonable interpretations of the tax laws; however, its positions may be subject to challenge upon audit. Management accrues for nonincome tax contingencies that are judged to be both probable and estimable. Management has also identified other unaccrued nonincome tax

contingencies, which are considered reasonably possible but not probable, totaling approximately $38 million as of December 31, 2007.

The Corporation is a member of the Visa USA network. On October 3, 2007, the Visa organization completed a series of restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa, Inc. As a result of Visa’s restructuring, the Corporation’s membership interest in Visa USA was exchanged for an approximately 8% equity interest in Visa Inc. Class USA stock. On November 11, 2007, Visa Inc. filed a registration statement with the Securities and Exchange Commission for the offer and sale of its common stock to the public. Visa has disclosed that it plans to use the proceeds from its initial public offering to partially redeem Visa USA members’ equity interests and to fund the settlement of certain Visa USA related litigation.

Pursuant to the Visa USA bylaws, the Corporation is obligated to indemnify Visa, Inc. for certain losses. On October 3, 2007, a Loss Sharing Agreement (LSA) became effective which reaffirmed the Corporation’s obligation to indemnify Visa, Inc. for potential future settlement of certain litigation. The Corporation’s indemnification obligation is limited to its 8% proportionate equity interest in Visa USA. During 2007, Visa announced that it had recognized liabilities for probable settlements for two of the covered suits. The Corporation has accrued its proportionate share of these anticipated settlements. In addition, the Corporation has recognized a guarantee liability for the other covered suits. The guarantee liability was measured using a probability weighted cash flow model of the potential outcomes of the covered suits. As of December 31, 2007, the Corporation’s estimated liability related to its obligation to indemnify Visa for covered litigation was $292 million.

If the Visa initial public offering is successfully completed, the Corporation is expected to receive cash in partial redemption of its equity interest currently carried at zero value. Further, management expects that the indemnification obligation to Visa will be reduced when Visa either disburses funds for negotiated settlements, or funds an escrow account designated for settlement of covered litigation. Management expects that the gain to be realized from redemption of Visa shares will more than exceed the indemnification obligations recorded to date.

NatCity Investments, a wholly-owned broker-dealer subsidiary of the Corporation, acts as underwriter and remarketing agent for certain issuers of variable rate demand obligations (VRDOs). These VRDOs are issued with long stated maturities but are considered short-term instruments because of a “put” feature that allows the investor to tender the bonds to the remarketing agent. The bonds are traded at par and the yields on the bonds are generally reset on a weekly basis. The VRDOs are supported by various credit and liquidity enhancements, including letters of credit (LOCs), standby bond purchase agreements (SBPAs), and bond insurance. As a result of increased uncertainty in the markets, investors becoming more risk averse, and actual or potential downgrading in ratings for both bond insurers and providers of LOCs and SBPAs, remarketing agents are experiencing less liquidity in the VRDO market. If NatCity Investments is unable to successfully remarket the securities, it has the option of holding the bonds on its balance sheet or putting the bonds to the issuer who would then draw upon the LOCs and SBPAs. At December 31, 2007, NatCity Investments was remarketing agent for approximately $3 billion of VRDOs, of which approximately $2 billion were backed by National City Bank credit and liquidity enhancements.

Litigation: National City and its subsidiaries are involved in a number of legal proceedings arising from the conduct of their business activities. These proceedings include claims brought against the Corporation and its subsidiaries where National City acted as depository bank, lender, underwriter, fiduciary, financial advisor, broker, or other business activities. Reserves are established for legal claims when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, including almost all of the class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.

On or about November 22, 2002, a claim was asserted in the Marion County Probate Court (Indiana) against National City Bank of Indiana, a subsidiary of the Corporation since merged into National City Bank, concerning management of investments held in a trust for the benefit of the Americans for the Arts and The Poetry Foundation. The claim alleged failure to adequately and timely diversify investments held in this trust, which resulted in investment losses. The beneficiaries were seeking damages of as much as $100 million. In December 2005, the court entered an order

granting National City Bank of Indiana’s motion for summary judgment, and the beneficiaries filed an appeal. On October 19, 2006, the Indiana Court of Appeals, in a unanimous decision, affirmed the order granting National City Bank of Indiana’s motion for summary judgment. By order dated March 8, 2007, the Indiana Supreme Court unanimously denied the beneficiaries’ motion to transfer the appeal to the Indiana Supreme Court. The beneficiaries have no further appeals as a matter of right.

Beginning on June 22, 2005, a series of antitrust class action lawsuits were filed against Visa^®, MasterCard^®, and several major financial institutions, including eight cases naming the Corporation and its subsidiary, National City Bank of Kentucky, since merged into National City Bank. The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claim that the interchange fees charged by card-issuing banks are unreasonable and seek injunctive relief and unspecified damages. The cases have been consolidated for pretrial proceedings in the United States District Court for the Eastern District of New York. On July 1, 2007, the Corporation and National City Bank entered into a Judgment Sharing Agreement (JSA) with respect to this litigation. This litigation is also subject to the Visa USA bylaws and the LSA discussed above. On September 7, 2007, the Magistrate Judge recommended to the District Court that all claims that predate January 1, 2004 should be dismissed. Given the preliminary stage of the remaining suits, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of potential loss.

On March 31, 2006, the Corporation and National City Bank were served with a patent infringement lawsuit filed in the United States District Court for the Eastern District of Texas. The plaintiff, Data Treasury Corporation, claims that the Corporation, as well as over 50 other financial institutions or check processors, infringed on its patents involving check imaging, storage and transfer. The plaintiff seeks damages and injunctive relief. On January 6, 2006, the US Patent and Trademark Office (USPTO) ordered a re-examination of certain of the patents (the Ballard Patents) and the Court stayed the litigation as to those patents. Subsequently, the USPTO confirmed the patentability of all claims of the Ballard patents under re-examination and the Plaintiff has now indicated its intention to ask the court to lift the stay. On or about July 27, 2007, the USPTO granted re-examination of the other patents in suit (the Huntington Patents) and the Court stayed the litigation as to those patents. At this stage of this lawsuit, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of potential loss.

On December 19, 2005, a class action suit was filed against National City Mortgage Co. in the U.S. District Court for the Southern District of Illinois. The lawsuit alleges that National City Mortgage loan originators were improperly designated as exempt employees and seeks monetary damages. On June 21, 2007, the court conditionally certified an opt-in class of loan originators. On November 6, 2007, a settlement in principle was reached to resolve all wage and hour claims of the loan originators employed during the class period that opt-in to the settlement class. This settlement is subject to court approval. At December 31, 2007, the Corporation has a $25 million reserve accrued for this matter.

On January 10 and January 17, 2008, two putative class action lawsuits were filed in the United States District Court for the Northern District of Ohio against National City Corporation, the Administrative Committee for the National City Savings and Investment Plan and certain current and former officers and directors of the Corporation. The complaints allege violations of the Employee Retirement Income Security Act (ERISA) relating to the Corporation’s stock being offered as an investment alternative for participants in the Plan. The complaints seek unspecified money damages and equitable relief. At this stage of these lawsuits, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of any potential loss.

On January 18 and January 28, 2008, two shareholder derivative complaints were filed in the United States District Court for the Northern District of Ohio against certain current and former officers and directors of the Corporation alleging breach of fiduciary duty, waste of corporate assets, unjust enrichment and violations of the Securities Exchange Act of 1934. On February 6, 2008, two shareholder derivative actions were filed in Chancery Court for the state of Delaware against certain current and former officers and directors of the Corporation alleging breach of fiduciary duty and unjust enrichment. On February 11, 2008, a shareholder derivative action was filed in Common Pleas Court in Cuyahoga County, Ohio against certain current and former officers and directors of the Corporation alleging breach of fiduciary duty and unjust enrichment. All of these shareholder derivative lawsuits make substantially identical allegations against substantially identical parties. The complaints seek unspecified money damages and equitable relief. At this stage of these lawsuits, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of potential loss.

On January 24, 2008, a putative class action lawsuit was filed in the United States District Court for the Northern District of Ohio against National City Corporation and certain current and former officers and directors of the Corporation. The complaint alleges violations of federal securities laws and seeks unspecified damages and equitable relief on behalf of purchasers of the Corporation’s stock during the period April 30, 2007 to January 2, 2008. At this stage of the lawsuit, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of any potential loss.

Based on information currently available, consultation with counsel, available insurance coverage and established reserves, management believes that the eventual outcome of all claims against the Corporation and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on consolidated financial position or results of operations. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period.


23.	Stock Options and Awards

Under the National City Corporation Long-Term Cash and Equity Incentive Plan (the Long-Term Incentive Plan) up to 45 million shares of National City common stock may be made the subject of option rights, stock appreciation rights, restricted awards, common stock awards, or restricted stock units, in the aggregate. In addition, no more than 13 million shares may be awarded in the form of restricted stock, restricted stock units, or common stock awards; and no more than 40 million shares may be awarded in the form of incentive stock options. As of December 31, 2007, stock options and restricted stock awards available for grant under the Long-Term Incentive Plan totaled 16.8 million and 4.2 million shares, respectively.

Stock Options: Stock options may be granted to officers and key employees to purchase shares of common stock at the market price of the common stock on the date of grant. These options generally become exercisable to the extent of 25% to 50% annually, beginning one year from the date of grant, and expire no later than 10 years from the date of grant. Prior to 2006, stock options were also granted that included the right to receive additional options if certain criteria are met. The exercise price of an additional option is equal to the market price of the common stock on the date the additional option is granted. Additional options vest six months from the date of grant and have a contractual term equal to the remaining term of the original option. During 2007, 2006, and 2005, pretax compensation expense recognized for stock options totaled $20 million, $23 million, and $20 million, respectively. The associated tax benefit was $6 million, $7 million, and $6 million for 2007, 2006, and 2005, respectively.

The fair values of stock options were estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was originally developed for use in estimating the fair value of traded options, which have different characteristics from the Corporation’s employee stock options. The model is sensitive to changes in assumptions which can materially affect the fair value estimate. The Corporation’s method of estimating expected volatility includes both historical volatility and implied volatility based upon National City options traded in the open market. The expected dividend yield is estimated based on the expected dividend rate over the term of the options. The expected term of the options is based on the Corporation’s historical exercise experience, and the risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term approximating the expected life of the options. The following assumptions were used to determine the fair value of options granted in the periods stated below.



	For the Calendar Year
	2007			2006			2005


Expected volatility		24.0	%		19.8	%		20.3	%
Expected dividend yield		4.0			4.3			4.2
Risk-free interest rate		4.1			4.0			3.9
Expected term (in years)		6			6			6

The weighted-average grant date fair value per share of options granted during 2007, 2006, and 2005, was $3.92, $5.21, and $5.12, respectively. The total intrinsic value of options exercised during 2007, 2006, and 2005, was $73 million, $80 million, and $68 million, respectively. As of December 31, 2007, there was $38 million of total unrecognized compensation cost related to nonvested stock option awards. This cost is expected to be recognized over a period of four years.

In 2007 and 2006, upon the consummation of the Mid America and Harbor acquisitions, all outstanding options issued by these entities became fully vested and were converted into equivalent National City options.

Cash received from the exercise of options for 2007, 2006, and 2005, was $161 million, $206 million, and $154 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $23 million, $25 million, and $19 million for 2007, 2006, and 2005, respectively. The Corporation generally uses treasury shares to satisfy stock option exercises.

Stock option activity follows:



						Weighted-
						Average
				Weighted-		Remaining
				Average		Contractual		Aggregate
				Exercise		Term		Intrinsic Value
	Shares			Price		(in years)		(In thousands)


Outstanding at January 1, 2007		43,014,406		$	31.36
Acquisition		5,303,419			17.29
Granted		7,635,514			22.02
Exercised		(7,858,192	)		26.47
Forfeited or expired		(1,902,046	)		34.49


Outstanding at December 31, 2007		46,193,101		$	28.90		4.9	$	3,988


Exercisable at December 31, 2007		36,093,243		$	29.90		3.8	$	3,988


Outstanding at January 1, 2006		50,135,498		$	30.72
Acquisition		738,314			14.37
Granted		2,625,784			36.58
Exercised		(9,576,897	)		27.76
Forfeited or expired		(908,293	)		35.17


Outstanding at December 31, 2006		43,014,406		$	31.36		4.7	$	227,298


Exercisable at December 31, 2006		36,402,595		$	30.59		4.1	$	220,992


Outstanding at January 1, 2005		54,700,740		$	29.83
Granted		2,914,859			35.30
Exercised		(6,553,014	)		24.95
Forfeited or expired		(927,087	)		33.48


Outstanding at December 31, 2005		50,135,498		$	30.72		5.1	$	174,941


Exercisable at December 31, 2005		41,662,765		$	29.83		4.3	$	174,916

Restricted Shares: Restricted common shares may currently be awarded to officers, key employees, and outside directors. In general, restrictions on outside directors’ shares expire after nine months, and restrictions on shares granted to key employees and officers expire within a four-year period. The Corporation recognizes compensation expense over the restricted period. Pretax compensation expense recognized for restricted shares during 2007, 2006 and 2005 totaled $57 million, $46 million, and $38 million, respectively. The tax benefit was $21 million, $17 million, and $14 million in 2007, 2006 and 2005, respectively

Restricted share activity follows:



	2007					2006					2005

				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Grant Date					Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value


Nonvested at January 1		7,344,918		$	34.96		6,452,193		$	33.74		4,838,125		$	33.10
Granted		2,879,400			22.77		2,496,784			36.50		2,626,357			34.79
Vested		(1,426,695	)		33.17		(1,033,190	)		31.47		(682,971	)		32.43
Forfeited		(461,473	)		34.96		(570,869	)		34.29		(329,318	)		33.80


Nonvested at December 31		8,336,150		$	31.03		7,344,918		$	34.96		6,452,193		$	33.74

As of December 31, 2007, there was $104 million of total unrecognized compensation cost related to restricted shares. This cost is expected to be recognized over a weighted-average period of 2.6 years. The total fair value of shares vested during 2007, 2006, and 2005 was $42 million, $37 million, and $24 million, respectively.


24.	Pension and Other Postretirement Benefit Plans

Defined Benefit Plans: National City has a qualified pension plan covering substantially all employees hired prior to April 1, 2006. Pension benefits are derived from a cash balance formula, whereby credits based on salary, age, and years of service are allocated to employee accounts. As required by the Pension Protection Act, National City has amended the plan to change the plan’s vesting requirements from five years to three years. Actuarially determined pension costs are charged to benefits expense in the income statement. The Corporation’s funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974.

The Corporation maintains nonqualified supplemental retirement plans for certain key employees. All benefits provided under these plans are unfunded, and payments to plan participants are made by the Corporation.

In connection with the Harbor acquisition, the Corporation acquired a frozen multi-employer pension plan. This plan was terminated in June 2007 at a cost of $7 million. In connection with the Fidelity acquisition, the Corporation acquired a frozen qualified defined benefit pension plan. There were no contributions to this plan for the year ended December 31, 2007.

National City also has a benefit plan offering postretirement medical and life insurance benefits. The medical portion of the plan is contributory and the life insurance coverage is noncontributory to the participants. As of April 1, 2006, retiree life insurance was eliminated for active employees who were not yet participants in the plan. As a result, the postretirement obligation decreased by $10 million and the net periodic cost decreased by $7 million for 2006. The Corporation has no plan assets attributable to the plan, and funds the benefits as claims arise. Benefit costs related to this plan are recognized in the periods employees provide service for such benefits. The Corporation reserves the right to terminate or make plan changes at any time.

The asset allocation for the defined benefit pension plan as of the measurement date, by asset category, is as follows:



	Percentage of Plan Assets

Asset Category	2007			2006


Equity securities		80	%		81	%
Debt securities		9			9
Cash and cash equivalents		11			10


Total		100	%		100	%

The investment objective for the qualified pension plan is to maximize total return with tolerance for slightly above average risk. Asset allocation strongly favors equities, with a target allocation of approximately 80% equity securities,

15% fixed income securities, and 5% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate. A core equity position of large cap stocks will be maintained. However, more aggressive or volatile sectors will be meaningfully represented in the asset mix in pursuit of higher returns. Higher volatility investment strategies such as credit risk, structured finance, and international bonds will be appropriate strategies in conjunction with the core position.

It is management’s intent to give the investment managers flexibility within the overall guidelines with respect to investment decisions and their timing. However, certain investments require specific review and approval by management. Management is also informed of anticipated changes in nonproprietary investment managers, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.

Equity securities include $122 million and $188 million of National City common stock at October 31, 2007 and 2006, respectively. The $122 million of National City common stock included in plan assets at October 31, 2007 represented 5,048,833 shares of stock at a closing price of $24.25 as of that date. During 2007, dividends of $8 million were paid on the shares included in plan assets.

Using an actuarial measurement date of October 31 for Pension and Other Postretirement Benefits and an actuarial measurement date of December 31 for Supplemental Pension Benefits, benefit obligation activity and plan assets for each of the plans follows:



	Pension						Supplemental						Other
	Benefits						Pension Benefits						Postretirement Benefits

(In Thousands)	2007			2006			2007			2006			2007			2006


Change in Benefit Obligation


Benefit obligation at beginning of measurement period				$	1,644,764		$	1,544,144		$	136,454		$	134,568		$	144,585
Service cost		59,554			58,127			1,872			1,590			1,520			1,776
Interest cost		97,718			89,437			9,060			7,856			8,355			8,523
Participant contributions		—			—			—			—			2,804			15,986
Plan amendments		3,751			—			—			—			184			(9,743	)
Acquisitions		24,765			—			56,287			—			468			—
Actuarial (gains) losses		(46,609	)		29,174			(287	)		2,437			(14,347	)		(7,431	)
Benefits paid		(89,207	)		(76,118	)		(58,532	)		(9,997	)		(11,330	)		(23,758	)


Benefit obligation at end of measurement period	$	1,694,736		$	1,644,764		$	144,854		$	136,454		$	132,239		$	144,585


Change in Fair Value of Plan Assets


Fair value at beginning of measurement period	$	1,881,470		$	1,725,560		$	—		$	—		$	—		$	—
Actual return on plan assets		224,338			235,301			—			—			—			—
Employer contribution		—			—			58,532			9,997			8,526			7,772
Participant contributions		—			—			—			—			2,804			15,986
Expenses paid		(5,234	)		(3,273	)		—			—			—			—
Acquisitions		31,598			—			—			—			—			—
Benefits paid		(89,207	)		(76,118	)		(58,532	)		(9,997	)		(11,330	)		(23,758	)


Fair value at end of measurement period	$	2,042,965		$	1,881,470		$	—		$	—		$	—		$	—


Funded status at end of measurement period	$	348,229		$	236,706		$	(144,854	)	$	(136,454	)	$	(132,239	)	$	(144,585	)

Reconciliation of the funded status at the end of the measurement period to the amounts recognized in the statement of financial position as of December 31 follows:



	Pension					Supplemental						Other
	Benefits					Pension Benefits						Postretirement Benefits

(In Thousands)	2007			2006		2007			2006			2007			2006

Funded status at end of measurement period	$	348,229		$	236,706	$	(144,854	)	$	(136,454	)	$	(132,239	)	$	(144,585	)
Unrecognized costs		(4,755	)		—		4,151			—			—			—
Benefits paid		—			—		(703	)		2,051			1,445			1,588
Acquisition		(9,741	)		—		(2,236	)		(1,908	)		—			(573	)


Accrued income and other assets/ (accrued expenses and other liabilities) at year end	$	333,733		$	236,706	$	(143,642	)	$	(136,311	)	$	(130,794	)	$	(143,570	)

The accumulated benefit obligation for the qualified pension plan was $1.7 billion and $1.6 billion at October 31, 2007 and 2006, respectively.

The weighted-average assumptions used to determine benefit obligations at the measurement date were as follows:



	Pension Benefits						Supplemental Pension Benefits						Other Postretirement Benefits

	2007			2006			2007			2006			2007			2006

Discount rate		6.25	%		6.00	%		6.25	%		6.00	%		6.25	%		6.00	%
Rate of compensation increase		2.75–7.50			2.75–7.50			5.00			5.00			2.75–7.50			2.75–7.50

The assumed healthcare cost trend rate, used in determining other postretirement benefits, at the measurement date follows:



	2007			2006

Health care cost trend rate for next year		9	%		10	%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)		4			5
Year the rates reach the ultimate trend rate		2012			2012

The healthcare trend rate assumption affects only those participants retired under the plan prior to April 1, 1989.

Assumed healthcare cost trend rates affect the amounts reported for the healthcare plan. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effect.



(In Thousands)	1-Percentage Point Increase		1-Percentage Point Decrease

Effect on total of service and interest cost	$	235	$	(205	)
Effect on postretirement benefit obligation		3,390		(2,961	)

Using an actuarial measurement date of October 31 for Pension and Other Postretirement Benefits and a measurement date of December 31 for Supplemental Pension Benefits, components of net periodic (income) cost follow:



(In Thousands)	2007			2006			2005


Pension Benefits
Service cost	$	59,554		$	58,127		$	59,540
Interest cost		97,718			89,437			85,171
Expected return on plan assets		(154,879	)		(138,728	)		(137,991	)
Amortization of prior service cost		(4,755	)		(4,755	)		(4,755	)
Recognized net actuarial loss		(209	)		456			739


Net periodic (income) cost	$	(2,571	)	$	4,537		$	2,704


Supplemental Pension Benefits
Service cost	$	1,872		$	1,590		$	1,427
Interest cost		9,060			7,856			7,841
Amortization of prior service cost		977			1,330			1,984
Recognized net actuarial loss		8,582			3,587			4,902


Net periodic cost	$	20,491		$	14,363		$	16,154


Other Postretirement Benefits
Service cost	$	1,520		$	1,776		$	3,384
Interest cost		8,355			8,523			8,931
Amortization of prior service cost		159			188			95
Transition obligation		808			907			1,402
Recognized net actuarial loss		276			573			979
Curtailment gain		—			(5,194	)		—


Net periodic cost	$	11,118		$	6,773		$	14,791

The weighted-average assumptions used to determine net periodic (income) cost for the years ended December 31 were as follows:



	Pension						Supplemental						Other
	Benefits						Pension Benefits						Postretirement Benefits

	2007			2006			2007			2006			2007			2006

Weighted-Average Assumptions
Discount rate		6.00	%		6.00	%		6.00	%		6.00	%		6.00	%		6.00	%
Rate of compensation increase		2.75-7.50			2.75-7.50			5.00			5.00			2.75-7.50			2.75-7.50
Expected long-term return on plan assets		8.50			8.50			—			—			—			—

The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan’s target asset allocation. The expected return on equities was computed utilizing a valuation framework, which projected future returns based on current equity valuations rather than historical returns. Due to active management of the plan’s assets, the return on the plan’s equity investments historically has exceeded market averages. Management estimated the rate by which the plan assets would outperform the market in the future based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on equities compared to past periods.

National City does not anticipate making a contribution to its qualified pension plan in 2008 as the plan is currently overfunded. The 2008 pension plan assumptions used to determine net periodic cost will be a discount rate of 6.25% and an expected long-term return on plan assets of 8.50%.

At December 31, 2007, the projected benefit payments for each of the plans are as follows:



					Other
	Pension		Supplemental		Postretirement		Total
(In Millions)	Benefits		Pension Benefits		Benefits		Benefits

2008	$	85	$	21	$	10	$	116
2009		89		14		10		113
2010		91		14		11		116
2011		94		13		11		118
2012		100		13		11		124
2013 – 2017		574		59		55		688

The projected payments were calculated using the same assumptions as those used to calculate the benefit obligations listed above.

Amounts recognized in accumulated other comprehensive income, net of tax, as of December 31, 2007 follow:



	Pension			Supplemental		Postretirement
(In Thousands)	Benefits			Pension Benefits		Benefits			Total

Prior service cost	$	(5,208	)	$	958	$	903		$	(3,347	)
Transition obligation		—			—		1,614			1,614
Net loss		(18,922	)		13,642		(126	)		(5,406	)


Total	$	(24,130	)	$	14,600	$	2,391		$	(7,139	)

Amounts recognized in accumulated other comprehensive loss, net of tax, as of December 31, 2006 follow:



	Pension			Supplemental		Postretirement
(In Thousands)	Benefits			Pension Benefits		Benefits		Total

Prior service cost	$	(13,590	)	$	2,195	$	889	$	(10,506	)
Transition obligation		—			—		2,128		2,128
Net loss		50,773			19,955		8,997		79,725


Total	$	37,183		$	22,150	$	12,014	$	71,347

The estimated costs that will be amortized from accumulated other comprehensive (income) loss into net periodic (income) cost over the next fiscal year are as follows:



	Pension			Supplemental		Postretirement
(In Thousands)	Benefits			Pension Benefits		Benefits		Total

Prior service cost	$	(3,698	)	$	965	$	227	$	(2,506	)
Transition obligation		—			—		808		808
Net loss		—			1,932		—		1,932


Total	$	(3,698	)	$	2,897	$	1,035	$	234

Defined Contribution Plans: Substantially all employees are eligible to contribute a portion of their pretax compensation to a defined contribution plan. The Corporation may make contributions to the plan for employees with one or more years of service in the form of National City common stock in varying amounts depending on participant contribution levels. In 2007 and 2006, the Corporation provided up to a 6.9% matching contribution. For both years ended 2007 and 2006 the expense related to the plan was $84 million. For the year ended 2005 the expense was $79 million.

The Corporation also acquired Harbor’s leveraged employee stock ownership plan (ESOP) plan, which covered all eligible Harbor employees age 21 and over. Dividends paid on unallocated shares reduce the Corporation’s cash contribution to the ESOP. The ESOP’s loan from the Corporation is eliminated in consolidation. For years ended 2007 and 2006, allocated shares were 942,201 and 1,134,686, respectively, shares committed to be released were 85,245, and suspense (unallocated and not yet committed to be released) shares held by the ESOP were 852,455 and 937,700,

respectively. As shares are released, the Corporation recognizes compensation expense equal to the current market price of the shares. Allocated shares and shares committed to be released are included in the weighted-average common shares outstanding used to compute earnings per share. In 2007 and 2006, the Corporation recorded compensation expense of approximately $3 million and $.3 million, respectively. For years ended 2007 and 2006, the fair value of the unallocated shares was $14 million and $34 million, respectively.


25.	Derivative Instruments and Hedging Activities

The Corporation uses derivative instruments primarily to protect against the risk of adverse price or interest-rate movements on the value of certain assets and liabilities and on future cash flows. It also executes derivative instruments with its commercial banking customers to facilitate their risk management strategies. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract. A notional amount represents the number of units of a specific item, such as currency units or shares. An underlying represents a variable, such as an interest rate, security price, or price index. The amount of cash or other asset delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying. Derivatives are also implicit in certain contracts and commitments, such as residential and commercial real estate loan commitments associated with loans to be sold, which by definition qualify as derivative instruments under SFAS 133.

Market risk is the risk of loss arising from an adverse change in interest rates, exchange rates, or equity prices. The Corporation’s primary market risk is interest-rate risk. Management uses derivative instruments to protect against the risk of interest-rate movements on the value of certain assets and liabilities and on future cash flows. These instruments include interest-rate swaps, interest-rate futures, interest-rate options, forward agreements, and interest-rate caps and floors with indices that relate to the pricing of specific assets and liabilities. The nature and volume of the derivative instruments used to manage interest-rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated rate environments.

As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk. Market risk associated with changes in interest rates is managed in conjunction with the Corporation’s overall market risk monitoring process, as further discussed in the Market Risk section within Item 7.

Credit risk occurs when a counterparty to a derivative contract, where the Corporation has an unrealized gain, fails to perform according to the terms of the agreement. Credit risk is managed by limiting the aggregate amount of net unrealized gains in agreements outstanding, monitoring the size and the maturity structure of the derivative portfolio, applying uniform credit standards to all activities with credit risk, and collateralizing gains. The Corporation has established bilateral collateral agreements with its major derivative dealer counterparties that provide for exchanges of marketable securities or cash to collateralize either party’s net gains. At December 31, 2007, these collateral agreements covered 99.5% of the notional amount of the total derivative portfolio, excluding futures contracts that are cash settled daily with counterparties, certain forward commitments to sell or purchase mortgage loans or mortgage-backed securities, and customer derivative contracts. At December 31, 2007, the Corporation held cash, U.S. government, and U.S. government-sponsored agency securities with a fair value of $452 million to collateralize net gains with counterparties and had pledged or delivered to counterparties cash, U.S. government, and U.S. government-sponsored agency securities with a fair value of $161 million to collateralize net losses with counterparties. In certain instances, open forward commitments to sell or purchase mortgage loans or mortgage-backed securities are not covered by collateral agreements due to the fact these contracts usually mature within 90 days. The credit risk associated with derivative instruments executed with the Corporation’s commercial banking customers is essentially the same as that involved in extending loans and is subject to similar credit policies. Collateral may be obtained based on management’s assessment of the customer.

Derivative contracts are valued using observable market prices, when available. In the absence of observable market prices, the Corporation uses discounted cash flow models to estimate the fair value of its derivatives. The interest rates used in these cash flow models are based on forward yield curves that are observable in the current cash and derivatives markets, consistent with how derivatives are valued by market participants. Cash flow models used for

valuing derivative instruments are regularly validated by testing through comparison with other third parties. The estimated fair value of a mortgage banking loan commitment is based on the change in estimated fair value of the underlying mortgage loan and the probability that the mortgage loan will fund within the terms of the loan commitment. The change in fair value of the underlying mortgage loan is based on quoted mortgage-backed securities prices. The probability that the loan will fund is derived from the Corporation’s own historical empirical data. The change in value of the underlying mortgage loan is measured from the commitment date. At the time of issuance, the estimated fair value of the commitment is zero. The valuations presented in the following tables are based on yield curves, forward yield curves, and implied volatilities that were observable in the cash and derivatives markets on December 31, 2007 and 2006.

Fair Value Hedges: The Corporation primarily uses interest-rate swaps, interest-rate futures, interest-rate caps and floors, interest-rate options, interest-rate forwards, and forward purchase and sales commitments to hedge the fair values of residential mortgage and commercial real estate loans held for sale and certain fixed-rate commercial portfolio loans for changes in interest rates. The Corporation also uses receive-fixed interest-rate swaps to hedge the fair value of certain fixed-rate funding products against changes in interest rates. The funding products hedged include purchased certificates of deposit, long-term FHLB advances, senior and subordinated long-term debt, and senior bank notes.

For fair value hedges of fixed-rate debt, including purchased certificates of deposit, management uses a monthly dollar offset ratio to test retrospective effectiveness. For fair value hedges of portfolio loans and residential mortgage loans held for sale, a dollar offset ratio test is performed on a daily basis. Effectiveness testing for commercial real estate loans held for sale is measured monthly using a dollar offset ratio. There were no components of derivative instruments that were excluded from the assessment of hedge effectiveness.

For 2007, 2006 and 2005, the Corporation recognized total net ineffective fair value hedge gains of $3 million, $4 million, and $60 million, respectively. Details of net ineffective hedge gains and losses by hedge strategy are presented in the table on page 128. Net ineffective hedge gains and losses on residential mortgage and commercial real estate loans held for sale are included in loan sale revenue on the income statement. Net ineffective hedge gains and losses related to hedging commercial portfolio loans and fixed-rate funding products are included in other noninterest income on the income statement.

Cash Flow Hedges: The Corporation hedges cash flow variability related to variable-rate commercial loans and funding products, specifically FHLB advances and senior bank notes. Interest-rate floors are used to hedge the cash flows associated with variable-rate commercial loans while interest-rate caps are used to hedge cash flows from the variable-rate funding products.

Retrospective hedge effectiveness for cash flow hedges of variable-rate funding products is determined using a dollar offset ratio applied on a monthly basis. Retrospective hedge effectiveness for variable-rate commercial loans is determined on a monthly basis using regression analysis. There were no components of derivative instruments that were excluded from the assessment of hedge effectiveness. For 2007, 2006 and 2005, the Corporation recognized net ineffective cash flow hedge (losses) gains of $(65) thousand, $31 thousand, and $(342) thousand, respectively. These losses are included in other noninterest income on the income statement.

Derivative gains and losses reclassified from accumulated other comprehensive income to current period earnings are included in the line item in which the hedged cash flows are recorded. At December 31, 2007 and 2006, accumulated other comprehensive income included a deferred after-tax net gain (loss) of $70 million and $(4) million, respectively, related to derivatives used to hedge loan and funding cash flows. See Note 19 for further detail of the amounts included in accumulated other comprehensive income. The net after-tax derivative gain included in accumulated other comprehensive income at December 31, 2007 is projected to be reclassified into net interest income in conjunction with the recognition of interest payments on loan and funding products through August 2013, with $3 million of after-tax net loss expected to be recognized in net interest income within the next year. There were no gains or losses reclassified into earnings in 2007 or 2006 arising from the determination that the original forecasted transaction would not occur. In 2005, a pretax gain of $8 million was reclassified from other comprehensive income to noninterest expense as a component of the net gain on the extinguishment of certain variable-rate debt secured by automobile leases.

The notional amounts of the derivatives portfolio used for interest-rate risk management purposes and designated as accounting hedges under SFAS 133 follows:



	December 31

(In Millions)	2007		2006

Fair Value Hedges
Commercial loans
Receive-fixed interest rate swaps	$	60	$	112
Pay-fixed interest rate swaps		2,318		2,712
Interest rate caps sold		50		150
Interest rate floors sold		100		100
Interest rate collars purchased		5		5
Interest rate futures purchased		1,587		2,204
Interest rate futures sold		1,937		2,595


Total		6,057		7,878


Mortgage loans held for sale
Net forward commitments to sell mortgage loans and mortgage-backed securities		1,283		1,855
Receive-fixed interest rate swaps		400		1,775
Receive-fixed interest rate swaptions purchased		600		—
Pay-fixed interest rate swaps		—		550
Pay-fixed interest rate swaptions purchased		650		—
Interest rate caps purchased		—		500
Interest rate floors purchased		—		500


Total		2,933		5,180


Commercial real estate loans held for sale
Forward commitments to sell commercial real estate loans		244		136
Interest rate futures purchased		8		—
Receive-fixed interest rate swaps		108		—


Total		360		136


Funding
Receive-fixed interest rate swaps		4,116		7,991
Callable receive-fixed interest rate swaps		3,154		2,706


Total		7,270		10,697


Total notional of derivatives used in fair value hedges		16,620		23,891


Cash Flow Hedges
Commercial loans
Interest rate floors purchased		13,800		—


Funding
Pay-fixed interest rate swaps		—		170
Interest rate caps purchased		300		300


Total		300		470


Total notional of derivatives used in cash flow hedges		14,100		470


Total notional of derivatives designated in SFAS 133 relationships	$	30,720	$	24,361

The fair value of derivative instruments used for interest-rate risk management purposes and designated as accounting hedges under SFAS 133 follows:



	December 31

	2007				2006

(In Millions)	Asset		Liability		Asset		Liability

Fair Value Hedges
Commercial loans
Receive-fixed interest rate swaps	$	.7	$	—	$	1.0	$	.3
Pay-fixed interest rate swaps		3.5		30.3		33.3		10.3
Interest rate collars purchased		—		.3		—		.2


Total		4.2		30.6		34.3		10.8


Mortgage loans held for sale
Net forward commitments to sell mortgage loans and mortgage-backed securities		.6		11.6		6.0		11.8
Receive-fixed interest rate swaps		10.2		—		12.0		27.7
Receive-fixed interest rate swaptions purchased		17.6		—		—		—
Pay-fixed interest rate swaps		—		—		—		6.8
Pay-fixed interest rate swaptions purchased		2.6		—		—		—
Interest rate floors purchased		—		—		1.8		—


Total		31.0		11.6		19.8		46.3


Commercial real estate loans held for sale
Forward commitments to sell commercial real estate loans		—		3.6		.2		1.3
Receive-fixed interest rate swaps		1.5		5.8		—		—


Total		1.5		9.4		.2		1.3


Funding
Receive-fixed interest rate swaps		140.1		1.5		112.1		115.8
Callable receive-fixed interest rate swaps		.2		61.6		—		87.5


Total		140.3		63.1		112.1		203.3


Total fair value of derivatives used in fair value hedges		177.0		114.7		166.4		261.7


Cash Flow Hedges
Commercial loans
Interest rate floors purchased		168.1		—		—		—


Funding
Pay-fixed interest rate swaps		—		—		—		.9
Interest rate caps purchased		—		.7		.1		—


Total		—		.7		.1		.9


Total fair value of derivatives used in cash flow hedges		168.1		.7		.1		.9


Total fair value of derivatives designated in SFAS 133 relationships	$	345.1	$	115.4	$	166.5	$	262.6

The net ineffective hedge gain (loss) recognized for each SFAS 133 hedge strategy follows:



	For the Calendar Year

(In Millions)	2007			2006			2005

Fair Value Hedges
Commercial loans	$	(8.7	)	$	6.2		$	21.9
Mortgage loans held for sale		9.0			(.6	)		6.7
Commercial real estate loans held for sale		(.5	)		—			—
Mortgage servicing rights		—			—			30.5
Commercial loans		—			—			—
Funding		3.0			(1.3	)		.5


Total fair value hedge gain		2.8			4.3			59.6


Cash Flow Hedges
Funding		(.1	)		—			(.3	)


Total cash flow hedge loss		(.1	)		—			(.3	)


Net ineffective hedge gain on SFAS 133 hedge strategies	$	2.7		$	4.3		$	59.3

Other Derivative Activities: The derivative portfolio also includes derivative financial instruments not included in SFAS 133 hedge relationships. These derivatives primarily consist of interest-rate swaps, futures, options, caps, floors, and forwards used to hedge the risk of declines in the value of residential mortgage servicing rights accounted for at fair value.

The notional amounts of derivative instruments used for mortgage servicing rights (MSR) risk management, which are not designated in SFAS 133 hedge relationships, are presented in the following table:



	December 31

(In Millions)	2007		2006

Net forward commitments to purchase mortgage loans and mortgage-backed securities	$	8,430	$	4,300
Basis swaps		178		—
Receive-fixed interest rate swaps		4,310		5,570
Receive-fixed interest rate swaptions purchased		6,150		7,300
Receive-fixed interest rate swaptions sold		—		3,000
Pay-fixed interest rate swaps		3,820		1,930
Pay-fixed interest rate swaptions purchased		2,150		2,550
Pay-fixed interest rate swaptions sold		—		2,000
Principal-only interest rate swaps		—		396
Interest rate caps purchased		5,750		2,500
Interest rate floors purchased		5,500		14,200
Interest rate futures purchased		—		1,410


Total derivative instruments used for MSR risk management	$	36,288	$	45,156

Assets and liabilities recognized for derivative instruments used for mortgage servicing rights risk management, which are not designated in SFAS 133 hedge relationships, are presented in the following table:



	December 31

	2007				2006

(In Millions)	Asset		Liability		Asset		Liability

Net forward commitments to purchase mortgage loans and mortgage-backed securities	$	—	$	72.6	$	—	$	22.2
Basis swaps		—		2.1		—		—
Receive-fixed interest rate swaps		80.9		13.7		12.9		124.0
Receive-fixed interest rate swaptions purchased		204.8		—		58.9		—
Receive-fixed interest rate swaptions sold		—		—		—		43.9
Pay-fixed interest rate swaps		.8		170.6		—		80.0
Pay-fixed interest rate swaptions purchased		55.7		—		31.9		—
Pay-fixed interest rate swaptions sold		—		—		—		39.1
Principal-only interest rate swaps		—		—		—		6.2
Interest rate caps purchased		24.1		—		—		—
Interest rate floors purchased		38.3		—		86.1

NATIONAL CITY CORP 8-K/A