Jeff Richardson - Director of Investor Relations and Corporate Analysis Mary Tuuk - Chief Risk Officer and Executive Vice President Kevin Kabat - Chief Executive Officer, President, Executive Director, Chairman of Finance Committee, Member of Trust Committee and Chief Executive Officer of Cincinnati at Fifth Third Bank Daniel Poston - Chief Financial Officer and Executive Vice President

Unknown Analyst -

Good morning. My name is Mische, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp First Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you, Mr. Jeff Richardson, Director of Investor Relations. You may begin your conference.

Thanks, Mische. Hello, and thanks for joining us today. Today, we'll be talking with you about our first quarter 2011 results. This call may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified a number of those factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call. I'm joined on the call by several people: Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston; Chief Risk Officer, Mary Tuuk; Treasurer, Mahesh Sankaran; and Jim Eglseder, Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin?

Thanks, Jeff. Good morning, everyone, and thanks for joining us. Today, we reported first quarter 2011 net income of $265 million or net income to common shareholders of $88 million or $0.10. Net income to common included the effect of $153 million of discount accretion on the TARP Preferred Stock, which is in the preferred dividend line. Excluding this item, net income to common was $241 million or $0.27 per share. It was an eventful quarter for Fifth Third. We completed and submitted our capital plan to the Federal Reserve at year-end. We issued $1.7 billion in common stock and $1 billion in senior debt in January, and in February redeemed the U.S. Treasury's $3.4 billion preferred stock investment in Fifth Third. In March, we repurchased a warrant issued to Treasury for $280 million. The warrant gave the Treasury the right to purchase 43.6 million shares at $11.72. And this repurchase eliminates this potential future dilution at what we consider to be a reasonable cost. Also in March, we increased our quarterly common stock dividend by $0.05 to $0.06 per share. We believe this is the first step towards beginning to normalize our dividend payout after 2 years of nominal dividend. With no TLGP debt outstanding, Fifth Third has completely exited all crisis-era government programs. We have a robust capital position with Tier 1 common of 9%, Tier 1 capital of 12.2%. We're confident we meet today any capital standards that will be set in the U.S. under the Basel III framework. Now turning to our quarterly results. Overall, they were in line with our expectations, with strengths and weaknesses reflecting broader aspects of the economy as it recovers. The interest rate environment negatively affected mortgage production and results. Loan demand, while improving, remains lower than would be typical at this stage of the cycle. However, debt capital markets have been very strong, which led to an elevated level of payoffs and refinancings during the quarter and diminished loan growth and yield relative to what we were expecting. Those effects were largely offset by the benefit of continued improving credit trends and lower credit costs. Dan and Mary will provide more details in their remarks, but I'll touch on a few high-level results. Average loans increased $1.4 billion or 2% sequentially. C&I loans were up 4%, and we saw some modest improvement in line utilization. We're seeing cautious optimism from businesses, and believe that we'll have continued momentum in this category in coming quarters. Auto loan growth also continued to be solid. That said, we expected higher loan growth coming into the quarter. While commercial loan originations have been exceptionally strong, payoff activity was higher than we would have expected seasonally as customers, particularly those in our syndicated loan and international books, took advantage of the historically low rate environment to refinance and lock in those rates, either through new financings or bond issues. This dynamic affected net interest income more than we've seen in previous quarters in both inhibiting loan growth and in spreads realized on our own production. Consumer yields declined as well, notably auto, where risk-adjusted spreads have been unusually attractive for the past couple of years. Deposit growth continues to be strong. Core deposits increased 1% sequentially, reflecting CD runoff. And transaction deposits, excluding CDs, increased 3%. This was stronger than we expected, which has been the case for a number of quarters. Our excess liquidity and the low value of free funding, given the low rate environment, also continued to inhibit the net interest margin. We're seeing good household growth in transaction deposit accounts, which bodes well for added business and longer-term deposit stickiness. We expect some growth in NII in the second quarter, with improvement in the second half of the year. We will reverse the $12 million impact of day count this quarter, half in each of the next 2 quarters. And high rate 3-year CDs placed in the second half of 2008 will experience additional maturities in the second half of 2011. Those factors will both add to NII in the next several quarters, which we expect to move back above $900 million in the third quarter. We also expect stronger loan growth as we move forward in the year as origination trends remain strong, and we expect payoff activity to stabilize and subside over time, given our largely middle market commercial portfolio. Mortgage banking results, as expected, were down significantly from the fourth quarter. Mortgage-related revenue decreased $56 million as mortgage rates increased, refinancing activity backed up and significantly reduced originations throughout the industry. We expect better results in the second quarter, given the seasonality. Finally, credit trends continue to improve or were stable, and virtually all trends were quite favorable outside the effects of 1 larger credit that resulted in $22 million of charge-offs. We saw positive results in most categories, and we also saw across-the-board improvements in all other early-stage metrics. Total nonperforming assets decreased 5%. Loans 90-plus days past due declined 3%, and loans 30 to 89 days past due declined 15%. We expect this general improvement to continue throughout the year, and Mary will further discuss our expectations in her remarks. As far as for the environment, we continue to see slow but steady progress in business sentiment in most of our markets, which seems to be the experience of much of the country right now. Uncertainty around the Durbin Amendment remains an overhang for the entire industry. Our recent developments suggest it's possible there may be a delay to permit a study of the impact of this bill on the debit business and banking customers. I believe a study is appropriate in a situation when a business which our industry and its customers have built over many years is called upon to transfer $10 billion to $15 billion to another industry without much discussion in Congress about the decision. We believe this bill would have a significant and negative impact on banking customers and welcome a study. When a customer shows up at a store, the debit card product makes that banking customers' checking account available to the merchant. With all the investment infrastructure we have built that make that possible and at our risk for that payment being good funds, this bill would cost a merchant to receive that service at below cost with either the customer or the bank paying for the benefit of that service to the merchant. We should be able to earn a reasonable profit on our investments and costs related to this product, rather than conduct business at a loss. However, we'll be ready to implement mitigation strategies when and if a rule is implemented, and we'll continue to evaluate our plans and competitor reaction as we see developments from Congress and The Fed. Another major topic surrounds last week's announcement of regulatory enforcement orders related to foreclosure practices directed at the 14 largest mortgage servicers. We are not 1 of the largest servicers, and we're not 1 of the institutions included in this process. However, we do fully expect servicing requirements included in these orders to become industry standards for all banks. We will evaluate the proposed standards and make any changes ultimately required to continue to serve our customers in the best way possible. We try to do that in all of our mitigation programs. We've consistently exceeded other servicers when it comes to conversions of hand modifications of GSC loans we service. Our 77% conversion rate of trial to permanent mod as of December 2010 was more than double the national average of 35%. As Mary will discuss, we've actively modified loans within our own portfolio as well and believe that program is working relatively well. These activities are consistent with our efforts to continue to enhance our customer satisfaction and experience. Our most recent scores based on the University of Michigan survey of Fifth Third's customers exceeded all named banks in their American Customer Satisfaction Index as well as the industry average. We've also have been similarly recognized by organizations such as J.D. Power and Forrester. So to sum up looking forward, we expect that operating results will generally continue to improve throughout 2011, as the first quarter tends to be seasonally weak. We have the capacity both in terms of capital and resources to grow our earnings and our balance sheet. Credit trends are improving, and we expect that to continue throughout the year, and we believe we are positioned well to generate overall stronger results as we move through 2011. With that, I'll ask Dan to discuss operating results and give some comments about our outlook. Dan?

Thanks, Kevin. Starting with Slide 4 of the presentation, in the first quarter we reported net income of $265 million and recorded preferred dividends of $177 million. Net income to common was $88 million. Of that $177 million in preferred dividends, $153 million of that was due to the accretion of the discount that was created at the time of the TARP investment, which was accelerated at the time of our repayment of TARP. Excluding that TARP discount accretion, net income to common would have been $241 million. Our return on assets was 1%, which was in line with our expectations for the quarter. We reported diluted earnings per share of $0.10 but excluding TARP, the TARP discount accretion diluted EPS would have been approximately $0.27. Going forward, preferred dividends should be approximately $8.5 million per quarter paid on the remaining $398 million of Series G convertible preferred securities that we have outstanding. These dividends were included in our EPS calculation this quarter due to the impact on earnings of the TARP discount accretion. Last quarter, the underlying shares were instead included in our fully diluted share count because the "if converted" method was more dilutive. We would currently expect future quarters to generally follow the "if converted" method due to our expected level of earnings. This is discussed more fully at the end of the release. While I expect this is challenging for you to manage in your models, the current effect is pretty minor and right now, it's generally under $0.01 per share between methods. Turning now to Slide 5, NII. Net interest income on a fully taxable equivalent basis declined $35 million sequentially to $884 million, and the net interest margin decreased 4 basis points to 3.71%. The sequential comparisons were driven by a number of factors which are outlined in the release. Day count was responsible for $12 million of the decline, as there were 2 fewer days in this quarter. We'll get back $6 million of that in the second quarter and another $6 million in the third. The full quarter effect of the refinancing of the FTPS loan that occurred in the fourth quarter reduced NII this quarter by about $8 million, and that's now fully baked into our run rate. That represented nearly half of the decline in the reported C&I loan yields. The mortgage warehouse balances were lower during the quarter due to lower originations in delivery activity, and that cost us about $8 million NII relative to the fourth quarter. And finally, the issuance of senior debt in connection with TARP repayment increased interest expense about $7 million. While our bottom line funding costs are lower post-TARP, preferred stock is, of course, free funding to the NII and to the NIM, and that $3.4 billion in free funding was cut in half during the quarter. Those factors reduced NII by $35 million. Otherwise, NII was flat with a number of puts and takes where as we were anticipating growth. Relative to the fourth quarter, on the positive side, average loans were up despite the FTPS refinancing, although we had expected more growth than we actually experienced. We had lower interest reversals on nonperforming loans, and deposit interest costs were lower. Offsetting those sequential positives, loan purchase accounting accretion was lower sequentially, and yields on commercial and consumer loan originations were down from last quarter. On that latter point, let me make a few additional comments. First on the commercial side, for the past several quarters, we've seen robust origination activity generally at record levels, but also relatively high paydowns and payoffs. In the first quarter, those trends continued. And refinancing and payoff activities increased while typical seasonality would be for it to decrease. As you know, capital markets conditions have been quite strong this quarter. And a number of our larger clients with stronger access to capital markets alternatives, whether that be bond issuance or syndicated loans, have been able to take advantage of those conditions. High-grade corporate bond yields, which are pretty attractive right now, were down something like 10 to 20 basis points from year-end, depending on the credit grid. Also interest rate expectations began to tick up in the first quarter, and that contributed to a desire to access markets sooner rather than later. We are participating in customer bond activity and syndicated loans, but the effect of those alternatives has reduced rough loan balances relative to what we would otherwise expect to experience. These alternatives also play a role in bank loan pricing, even if those alternatives are not pursued. Higher paydowns and lower origination yields together cost us $5 million to $10 million in NII versus our expectations this quarter. And that's excluding the effect of the FTPS loan, which I already mentioned. We expect commercial loan growth to pick up in the next several quarters, with origination activity remaining strong and with the impact of refinancing activity lessened, although we recognize that, that will continue to some degree. On the consumer side, originations are generally being made at lower yields than the loans at which they are replacing. That's true in most categories with auto loans being a notable example. Origination yields were lower, and auto prepayments were higher than we were expecting for the quarter, which also negatively impacted NII by $5 million to $10 million. We think the compression and origination yields is beginning to run its course so we should see some stabilization, although we don't expect them to actually improve in the near term. As I mentioned, core deposit costs were down, with the major factor being CD run off. The lion's share of the benefit we see from CD maturities comes in the second half of each year, due to the annual maturities of CDs originated in the second half of 2008. I'll discuss that more in a moment with the outlook. The net interest margin of 3.71% was down 4 basis points from the 3.75% last quarter. The FTPS refinancing cost and the TARP debt issuance each cost us about 3 basis points. That 6 basis points was partially offset by a 3 basis point benefit from day count. Otherwise, the margin was pretty flat. The factors I discussed a moment ago largely explain the main positives and negatives relative to the mortgage. Looking to the second quarter, we expect NII to be up due to a higher day count which should add about $6 million, but otherwise to be relatively consistent with the first quarter. As I mentioned, we expect stronger net loan growth in the latter half of the year as well as lower deposit costs. Repricing and runoff of CDs alone is expected to benefit NII by about $8 million in the third quarter and $15 million in the fourth quarter relative to second quarter levels, with about 3 quarters of that benefit coming from the maturities of second half of 2008 originated CDs. Therefore, we anticipate solid growth in second half NII versus second quarter levels. As Kevin mentioned, we should be above $900 million by the third quarter with additional growth in the fourth quarter. We currently expect the second quarter NIM to be relatively stable in the 370 range, with improvement thereafter in the second half of the year driven by lower deposit costs and loan growth. With that context, I'm turning to Slide 6. Let's go through the balance sheet in more detail. Average earning assets were down about $549 million sequentially, driven by lower short-term investments. That was largely cash all that fit. Average portfolio loans and leases increased $1.4 billion sequentially, which was largely offset by a $1.2 billion reduction in loans held-for-sale, primarily in the mortgage warehouse. Investment security balances were flat, as we continue to be very careful about managing our interest rate risk profile and continue to target a neutral to modestly asset-sensitive position. As I mentioned earlier, average loans held for investment were up $1.4 billion or 2% sequentially. We experienced positive average balance trends within C&I, residential mortgage and auto loans, which were up a combined $2 billion. That was partially offset by runoff in the CRE and home equity books of about $700 million. And I already mentioned a $1.2 billion decline in mortgage loans held-for-sale. Looking at each portfolio, average commercial loans increased $500 million or 1% from last quarter. C&I average loans increased $1 billion or 4% sequentially, including the effect of the FTPS refinancing, which reduced growth by almost $300 million. We've seen broad-based growth across a number of industries and sectors with continued strong production within manufacturing and service sector industries. As I mentioned earlier, we were expecting stronger growth this quarter. We had a good starting point in December, but the end of period balances grew only modestly. Commercial line utilization increased a bit this quarter, although it still remains at low levels at 33.3% compared with 32.7% last quarter and 32.6% a year ago. Those are down from normal levels in the low to mid-40s and that would represent about $4 billion in balances if that rate normalized. C&I loan production has been very strong in the past several quarters. But as I mentioned earlier, refinancing activity has also been high. That dynamic should shift more in our favor in terms of net growth in coming quarters, given our strong origination trends and pipelines and some moderation in the refi activity in the upper end of our loan book. In the CRE portfolio, we saw continued runoff in the commercial mortgage and commercial construction books, although the rate of decline has slowed. Average CRE balances were down $440 million or 3% sequentially, and we'd expect to see continued runoff in these portfolios in the near to intermediate term. Commercial real estate is only about 15% of loans so while it's a drag on growth, it's not big 1, and the impact from that runoff is beginning to slow. While we have the capacity to add to the CRE book, we don't expect to have an appetite for net growth at least until we see better balance between supply and demand for space, which we believe is still some time away. Average consumer loans in the portfolio increased $800 million or 2% sequentially. Most of that growth was in the residential mortgage book, which was up $900 million. Mortgage originations were $3.9 billion in the first quarter, a little over half of the origination level of the fourth quarter, which was of course very, very strong. Mortgage rates fluctuated throughout the first quarter but were generally higher, and that had a significant impact on refinancing activity. As we mentioned last quarter, we began retaining some mortgages we would normally deliver to agencies, the majority of which were simplified, refi mortgages originated through our retail branch system. That is a product that has lower LTVs, shorter durations and higher average rates, the most of the conforming loans we sell to agencies. We retained about $552 million of mortgages originated during the first quarter. We'll continually evaluate our appetite for retention of product versus investing in mortgage-backed securities. Average auto loan balances increased 2% sequentially. Our auto portfolio has continued to perform very well from a credit perspective throughout the cycle and yields have been relatively attractive, although we've seen some pressure there from a pricing standpoint due to recent increases in competition. The increase in auto loans was offset by lower home-equity loan balances, which were down 2% sequentially. I suspect it will be a while before we see growth here, given the lower equity levels among homeowners. Average credit card balances were flat sequentially. We still have additional customer base penetration that's available to us, although that is being offset by general balance declines throughout the industry as customers reduce their indebtedness. Looking ahead to the second quarter, we'd expect to see solid growth in C&I and auto loans, partially offset by a continued attrition in commercial real estate balances and home equity. We may see some growth in the mortgage balances, although as I mentioned earlier as we reinvest investment portfolio cash flows, we are now more likely to invest in mortgage-backed securities than we have been in the past few quarters. Overall, portfolio loans are currently expected to be up modestly in the second quarter with stronger results in the second half. Moving on to deposits. Average core deposits increased $1.1 billion or 1% on a sequential basis, which was stronger than we expected. That net growth is after the runoff in the consumer CDs, which are included in core deposits, which were down $1.1 billion sequentially. Average transaction deposits, excluding the CDs, were up $2.1 billion or 3% sequentially and were up $6 billion or 9% from a year ago. These are pretty broad-based increases across DDA, interest checking, savings and money market accounts. Average retail transaction deposits increased 3% sequentially and 14% year-over-year, with growth across all categories. We've had great success with our Relationship Savings product, which has now attracted over 11 billion of the balances since its inception 2 years ago. Given the current rate environment, we're seeing customers moving funds into liquid savings products when CDs mature, and we expect that to continue for the near term. Average commercial transaction deposits increased 3% from last quarter and 2% from a year ago. The largest driver of the sequential increase was seasonally higher public funds DDA balances. We expect core deposits to be relatively stable in the second quarter, as continued solid growth in transaction deposits is offset by CD runoffs. Moving on to fees as outlined on Slide 7. First quarter noninterest income was $584 million, a decrease of $72 million from last quarter. Mortgage-related revenue represented $56 million of that decline. Deposit service charges decreased $16 million sequentially with a $10 million decline in consumer deposit fees and a $6 million decline in commercial deposit fees. First quarter revenue was typically lower on a sequential basis, especially when compared with the seasonally strong fourth quarter due to reduced activity and the effect of tax refunds on overdraft occurrences, although occurrences were lower this quarter than we expected. We expect the seasonal increase in deposit fees in the second quarter up 5% or so. Investment advisory revenue increased 5% from the last quarter and 8% on a year-over-year basis. The sequential growth was driven largely by seasonally higher tax preparation fees, and the year-over-year increase was driven by an overall lift in the equity and bond markets, as well as improved production in the private bank institutional and brokerage revenue. We currently expect to see low single-digit growth NII revenue in the second quarter. Corporate banking revenue of $86 million decreased 17% from the fourth quarter, but increased 6% over last year. The fourth quarter is typically seasonally strong for us, and we saw particularly strong results last quarter in lease remarketing fees and loan syndication fees. We're looking for growth in the 10% range in the second quarter. Payment processing revenue was $80 million, consistent with the fourth quarter and up 10% from a year ago on strong transaction growth. The first quarter is seasonally weak, and we expect second quarter processing revenue to increase by about $10 million. Turning to mortgage banking. Revenue of $102 million decreased $47 million from a strong fourth quarter. Gains on deliveries were $62 million this quarter, compared with $158 million last quarter, as we saw significantly lower origination volumes and narrower spreads. Servicing fees of $58 million were flat sequentially, while net servicing asset valuation adjustments were negative $18 million this quarter, and that reflects MSR amortization of $28 million, offset by valuation adjustments on a positive $10 million. In the fourth quarter, net servicing asset valuation adjustments were a combined negative $67 million. Additionally, net securities gains on non-qualifying MSR hedges, which are recorded in a separate line item, were $5 million compared with $14 million in the fourth quarter. We currently expect seasonally stronger origination activity in the second quarter and for total mortgage-related revenue to be up $10 million or so. Turning next to other income within fees. Other income was $81 million and increased $26 million sequentially, driven by a $31 million reduction in credit-related costs included in this line item. Credit costs recorded in fee income were $3 million in the first quarter compared with $34 million last quarter. Net gains on loans held-for-sale were $1 million, including realized net gains of $17 million, offset by $16 million in fair value charges. Last quarter, we recorded net losses of that nature of about $14 million. Additionally, losses on the sale of OREO properties were an unusually low $2 million this quarter compared with $19 million last quarter. Overall, we expect credit-related costs within fee income to be around $25 million to $30 million in the second quarter. Overall, we expect second quarter fee income to be consistent with first quarter levels with seasonal rebounds and processing revenue, deposit service charges and corporate banking revenue, as well as modestly higher mortgage banking revenue. Offsetting those improvements, we expect a decline in other income due to higher credit-related costs, which while generally declining over time, won't be sustained at the nearly 0 level that we experienced this quarter. Turning to expenses which are on Slide 8. Noninterest expense of $918 million was down $69 million or 7% sequentially. The primary drivers were lower salary and benefits expense and lower credit-related expenses. Compensation expense was lower due to lower revenue base incentives, which more than offset seasonally higher payroll taxes, as well as careful and disciplined management of expenses, which we will continue to calibrate to the revenue environment as it continues to unfold. Credit-related costs within operating expense were $31 million in the first quarter compared with $53 million last quarter. 1 major driver of the decreased credit-related expenses related to mortgage repurchases, which were $8 million this quarter compared with $20 million last quarter as the reserve associated with repurchases was reduced by about $14 million. We've seen a reduction in our repurchase demand inventory which peaked last summer, as well as the transport lower loss severities on repurchases. Currently, we expect that general trend to continue as demands related to 2007 and prior years continue to decline. The other major driver of lower credit costs was a reduction of reserves for unfunded commitments, which was a credit of $16 million this quarter compared with a credit of $4 million in the fourth quarter. We currently expect total credit-related costs recognized in expense for the second quarter to be approximately $45 million, with the increase related to the expected absence of a repurchase reserve release. In total, we expect second quarter operating expenses to increase modestly from the first quarter levels. Moving on to Slide 9, and taking a look at pre-provision net revenue. PPNR was $545 million in the first quarter, and we expect PPNR to be at similar levels in the second quarter with modest increases in net interest income and expenses and relatively stable fees. We currently expect growth in the second half, driven in part by stronger NII results. Effective tax rate for the quarter was 30% which was consistent with last quarter, and we expect the full year tax rate in that same vicinity. Turning to capital on Slide 10. Capital levels are very strong. Tier 1 common ratio increased 150 basis points to 9%, reflecting our common issuance in conjunction with the repayment of TARP as well as higher retained earnings, which were partially offset by the effect of our warrant repurchase. Tier 1 ratio was 12.2%, down 180 basis points and reflecting transactions related to the redemption of TARP Preferred. The total capital ratio was 16.3%. Tangible common equity was 8.4%. We calculate that ratio excluding unrealized securities gains, which totaled $263 million. All in, TCE was 8.6%. Our capital position is obviously very strong and above the levels that we would target on a long-term basis. For instance, we continue to target Tier 1 common in the 8% range, and we expect organic capital generation to increase our capital ratios further. Raising the dividend this quarter was the first step towards returning more capital to our shareholders, and we'll continue to evaluate the dividend level as the year progresses. In terms of further management of capital, we expect loan growth to pick up and absorb some of our organic capital generation. We would expect share repurchases to form part of our capital management activities at the appropriate point in time. And our capital position may be utilized to some extent through M&A, although we can't plan for that to be the case. We will be disciplined on that front, and we don't expect anything in the near term. As we noted in our announcement last month, our capital plan incorporated the possible redemption of certain Trust Preferred Securities. We will continue to evaluate the role of Trust within our capital structure given the evolving rules, as our Tier 1 capital position is very strong with or without those instruments. That wraps up my remarks, and I'll turn it over to Mary now to discuss credit results and trends. Mary?

Thanks, Dan. Credit quality trends continue to remain quite positive as we move into 2011. Looking at first quarter results, charge-offs were negatively impacted by actions we took on a single credit relationship resulting in a $22 million charge-off in the first quarter, which I'll discuss in a moment. However, all underlying credit trends are positive. NPAs were down. Nonperforming loans were down. Nonperforming loan inflows were down. OREO is down. 90-plus delinquencies are down. 30-plus delinquencies are at their lowest levels since 2004. And charge-offs, excluding the 1 credit, were also down. While results can move around from quarter to quarter, we generally expect all key credit metrics to continue to improve during 2011, some substantially. Starting with charge-offs on Slide 11. Total net charge-offs of $367 million increased $11 million from the fourth quarter. The increase was driven by the $22 million in losses recorded on the single relationship noted above but otherwise, results were slightly better than expected. We've seen improvements in most areas of the portfolio and most geographies are stable to improving, although Florida remains challenged. We've seen significant improvements in our results from Michigan, which was an early and significant source of credit stress in recent years. While I wouldn't say results in Michigan are where they ought to be, experience there has begun to converge with the overall portfolio performance, and we've seen that for a few quarters now. Total commercial net charge-offs were $164 million in the first quarter, compared with commercial net charge-offs of $173 million in the fourth quarter. C&I charge-offs were $83 million, down $2 million from the prior quarter. Commercial mortgage charge-offs were $54 million for the quarter, down $26 million sequentially. Commercial construction charge-offs were $26 million, up $15 million from last quarter. The construction losses were primarily related to 2 homebuilders, although homebuilder losses remained relatively low at $22 million in total compared with $19 million in portfolio losses last quarter. You'll recall that we suspended homebuilder originations more than 3 years ago, have already recorded significant charge-offs against that portfolio and have significantly reduced our exposure. Portfolio balances are down to $651 million or less than 1% of total loan, significantly below the peak of $3.3 billion back in mid-2008. Total consumer net charge-offs were $203 million compared with $183 million last quarter, up $20 million, driven by the large charge-off I noted at the outset of my remarks. Regarding the credit in the fourth quarter, we classified it as a C&I loan on nonaccrual and foreclosed on the collateral. I spoke about this particular NPA in my remarks in January where we foreclosed on our collateral, which is a modest number of consumer loan. We subsequently determined that the foreclosure resulted in the credit being more appropriately classified as consumer loan rather than commercial, which is how it's classified in the annual report. During the first quarter, we charged off $22 million of these loans, which are recorded in other consumer loans and leases where you'll see charge-offs increase $20 million in the first quarter. We expect we'll see some additional charge-offs on this in the second quarter, and we've incorporated that into our outlook for charge-offs that I'll discuss in a minute. Excluding this credit, consumer net charge-offs were $181 million versus $183 million in the fourth quarter. Residential mortgage charge-offs were $65 million, up $3 million, although we expect substantial improvement in the second quarter and also later in the year. Home equity losses of $63 million were down $2 million from last quarter. We also expect results to improve here as well. Auto net charge-offs remained low at $20 million or 73 basis points. Credit card net charge-offs declined to $31 million or a relatively low 660 basis points. Trends in these portfolio are also positive. Looking ahead to the second quarter, we currently expect consumer charge-offs to decline, driven by lower mortgage and auto charge-offs, which together should be down $20 million or so. In commercial, we expect charge-offs to be down modestly. Total net charge-offs should be in the $330 million to $350 million range. We see continued good underlying loss trends and currently expect charge-offs in the second half of the year below an annualized rate of 150 basis points. We also expect commercial recovery to play a larger role in our net charge-off trends, which would further the improvement in our results down the road if realized. Now moving to NPAs on Slide 12. NPAs, including held-for-sale, totaled $2.3 billion at quarter end, down $126 million or 5% from the fourth quarter. Excluding held-for-sale, NPAs in the loan portfolio were $2.1 billion or 2.7% of loans, down from 2.8% of loans in the fourth quarter. My remaining comments on NPAs will focus on the held-for-investment portfolio, unless otherwise noted. Overall, Florida and Michigan remain our most challenged geographies from an NPA standpoint and accounted for 41% of NPAs in the commercial and consumer portfolios. However, NPAs in those 2 states were down $48 million sequentially. Commercial portfolio NPAs were $1.6 billion or 3.6% of loans, consistent with the fourth quarter. Commercial construction NPAs declined $11 million, while commercial mortgage NPAs increased by about $18 million. C&I NPAs increased $8 million or about 1%. Across the commercial portfolio, residential builder and developer NPAs of $249 million were down $10 million or 4% sequentially and represented about 16% of total commercial NPAs. Within portfolio NPAs, commercial TDRs on nonaccrual status increased modestly to $148 million this quarter from $141 million last quarter. We expect to continue to selectively restructure commercial loans where it makes economic sense for the bank. On the consumer side, NPAs totaled $538 million at the end of the quarter or 1.57% of loans and were down $58 million from the fourth quarter. Residential mortgage NPAs decreased $29 million during the quarter to $338 million. About half of our mortgage NPAs are in Florida. Home equity NPAs totaled $71 million at the end of the first quarter, down $1 million from last quarter. Auto NPAs were down $2 million, and credit card NPAs were down $2 million as well. Finally, other consumer NPAs declined $24 million from last quarter, driven by the large charge-off I discussed earlier. Looking ahead to the second quarter, we expect those commercial and consumer NPAs to decline in continuation of the trends we've been seeing over time. To give an update on the pool of commercial NPAs that are in held-for-sale, you'll recall that in the third quarter of 2010, we moved commercial loan with a net value of $574 million into held-for-sale status, bringing the total at that time to $680 million. At the end of the first quarter of 2011, we had $216 million of nonaccrual commercial loans held-for-sale, including $43 million of additions to the held-for-sale portfolio during the quarter. Additionally, we transferred approximately $10 million of loans from loans held-for-sale to OREO. During the quarter, we recorded negative valuation adjustments of $16 million on held-for-sale loans, and we recorded net gains of $17 million on loans that were sold or settled during the quarter. Gains, losses and valuation adjustments have roughly netted out, and our marks still feel appropriate. Total portfolio NPAs, commercial and consumer, are being carried at about approximately 60% of their original face value through the process of taking charge-offs, marks and specific reserves recorded through the first quarter. We work to be proactive in addressing problem loans and writing them down to realistic and realizable value. The next slide, Slide 13, includes the roll forward of non-performing loans. Commercial inflows of $299 million were generally consistent with the last several quarters and are less than half of levels realized in 2009. Consumer inflows for the quarter were the lowest we've seen since 2008. Total inflows of $412 million declined $55 million or 12%, also to a post-price that's low. Turning to Slide 14. The level of inflows as the proportion of our loan portfolio remains relatively low versus peers. A couple of years ago, we had higher relative inflows, and I think that's a reflection of our geography, which were impacted earlier than others and our aggressive recognition and resolution of issues as they occurred, which is benefiting us now. Turning to Slide 15, we provide some data on our consumer troubled debt restructuring. We have $1.8 billion of consumer TDRs on the books as of March 31, of which $1.6 billion were accruing loans and $209 million were nonaccrual. Among the accruing loans, $1.3 billion were current. And of those, about $1.1 billion were current and were restructured more than 6 months ago. We expect the vast majority of that $1.1 billion pool to stay current based on experience. More recent modification vintages have shown lower re-default rates on loans we restructured earlier in the cycle. Those recent vintages also constitute a larger proportion of the aggregate TDR pool. As you can see from the slide, while 2008 vintages experienced higher re-default levels, more recent vintages have trended toward a 12-month default frequency in the 25% range. Our modification activities continue to work relatively well as I think vintage trends demonstrates. Moving to Slide 16, which outlines delinquency trends. Loans 30 to 89 days past due totaled $538 million, down $98 million or 15% from last quarter, with consumer down $78 million and commercial down $20 million. On a year-over-year basis, these early stage delinquencies were down 39%. Loans 90-plus days past due were $266 million, down $8 million from the fourth quarter, with consumer down $17 million and commercial up $9 million, although they were still just $39 million. Total delinquencies of $804 million this quarter were down $106 million or 12% from last quarter and at the lowest level since 2006. On the provision in the allowance, which is outlined on Slide 17, provision expense for the quarter was $168 million and reflected a reduction to the loan loss allowance of $199 million. Our allowance coverage ratios remain very strong with coverage of nonperforming loans of 170%, nonperforming assets of 132% and coverage of annualized net charge-offs of nearly 2x. Given the anticipated trends in credit, we'd expect the loan loss reserve to continue to come down in coming quarters. That concludes my remarks. Operator, can you open up the line for questions at this time?

[Operator Instructions] Your first question comes from the line of Erika Penala with Bank of America.

I wanted to get an update first-hand on the SEC inquiry and whether or not it made an impact on how you classified or categorized underperforming credit this quarter?

I think overall, with respect to the SEC matter, we don't have any new information to report. I think we've said in our prior comments everything that we can say about that. We continue to provide the information that's requested and really don't have any additional insight in relationship to statements that we've made previously. Relative to current reporting, it's had absolutely no impact on how we classify non-accruals or how we account for or disclose any information in our financial statements.

And during your prepared remarks, you mentioned a propensity to both do M&A and buyback activity. I was wondering if you could give us a sense on what your priority levels are. Or is that really going to be dependent on whether or not the propensity to sell from properties where you're interested -- or in geographies as your interest picks up?

I think certainly the relative priority there with the likelihood of what you might see there will probably be determined by the nature of the M&A environment that we see over the next 6 to 12 to 18 months. So I think with the capital position that we have, we certainly think we are well positioned to participate in M&A activity. We also think that share repurchases will likely become part of our capital planning activities as we go forward. So I would expect that you will probably see some of both over the next 12 to 24 months.

This is Jeff. I would just add, there's not a lot of tension between those 2, because we've got $1 billion of excess capital on our target now. We expect that to grow. It's $2 billion over the Basel III proper standard, so we would expect to have excess capital in any instance.

The final thing I would just mention, Erika, is again in terms of M&A, I think there's kind of a growing expectation out there that that's imminent, and we don't see that as imminent per se, particularly given relative valuations today. Banks are still sold, and I think that has to improve a little bit and would probably take us into the latter part of this year or into next year even relative to properties becoming available.

From a size perspective -- from an asset size perspective, what's your maximum tolerance?

I'm not sure we would have a maximum tolerance. I think we've indicated that 1 of our primary objectives in M&A, as well as in our organic growth, would be to densify our footprint and become more relevant in some of the markets where we don't have a stronger share as we have in some of our primary markets. And therefore, I think the expectation would be that there would be acquisitions that might be on the smaller end, maybe in the $5 billion or so range that might be acquisitions that fill in markets that we're in currently, although certainly to the extent that larger acquisitions -- opportunities become available. I don't know that we would preclude ourselves from looking at those kinds of opportunity. But the focus would probably be more towards the smaller end.

Thank you.

And your next question comes from the line of Paul Miller with FBR Capital Markets.

Thank you very much. You talked about how you're seeing improvement credit in the Michigan market. Can you just add some color to that?

Yes. We're making that comment I think relative to the experience that we've had in the cycle over the last couple of years. So as you'll recall, as we're in the earlier stages of the cycle, the biggest challenges we've had from a geographic standpoint were in Michigan and in Florida and in particular in that Eastern Michigan region as we are working through some of our commercial real estate exposure. We've been very aggressive in working through that exposure. We have a very, very good handle on our remaining exposure in that area and feel very good about where we are in this point of the cycle. And as we've looked at the remaining real estate exposures in Michigan, we are seeing very much more of a convergence to an eventual operating environment that's more normalized. That being said, we're still mindful obviously of our real estate exposures in Florida and we're seeing improvement, but perhaps not quite at the pace that we are in Michigan.

And then going back to the capital management question. I don't think the street completely understands the process that goes forward. You announce the buyback, you can pay a dividend. To increase your dividend, do you have to go back to the Fed? And what's the process on that from here?

Well in general, I think banks submit submitted capital plans that had baked into them expectations relative to dividends. So the question do you need to go back every time you have a dividend increase I think depends on what was baked into the plan. Our plan had incorporated into it increasing levels of dividends that reflect our expectations that payout ratios would continue to increase over time and that our earnings would tend to increase over time. So therefore, there are certain levels of increases that are incorporated in our plan would not necessarily require an additional capital plan to be filed with the regulators. That being said, I think there is an expectation that on an annual basis, banks would file capital plans with the regulators and refresh all of their expectations relative to their capital management activities, including dividends.

I guess -- or if there's a change in capital plan to resubmit a plan.

It's unclear what -- it's unclear to us everything. That helped out a lot. That really cleared up a lot of stuff for us, because we didn't know. Some banks have said they have to resubmit to raise a dividend, but I guess for you guys, you don't have to. You show continued strong earnings and then you can, if you need to, you can raise that dividend.

There are some increases that have been incorporated into our plan which was not objected to. So within limits of what was incorporated in the plan, yes.

Thank you very much, gentlemen.

And your next question comes from the line of Mike Mayo with CLSA.

In terms of the commercial loan growth, what percentage of the link-quarter improvement in the commercial loan growth is due to syndicated lending?

If you -- let me just -- syndicated loan balances were up about $300 million during the quarter. So that was probably a decent portion of our growth, as you would expect from the environment that we're in from a capital markets standpoint.

Just to put that in perspective Mike, C&I loans grew about $1.4 billion in the first quarter and are what you would consider probably syndicated loan book or deals where there are 2 banks or more in the credit -- about 20% of our portfolio in total.

What are you seeing in the syndicated lending area more generally? I guess, you probably added to your fees this quarter, too. For the whole industry, it's up a lot year-over-year.

We've seen -- obviously, it's been very active, and it continues to be active. Typically, what you see in those deals are larger deals, stronger credits, stronger companies really improving their position and that activity we saw very much so in terms of actually the last few quarters. That continues from our standpoint. So -- and as you point out, Mike, you do tend, in participation, to get a good return, a fuller return of value with respect to some of the fees associated with that business.

Mike, I would add from a credit quality perspective that our overall credit metrics in that portfolio are actually stronger than in the other parts of our portfolio. And that's been the case for quite some time, so certainly we look closely at that as we think about that business opportunity.

You seem to have the lowest percentage of non-investment-grade syndicated loans, so it does seem like more of a quality emphasis. Is this a missed opportunity, or are you concerned about the non-investment-grade part of syndicated lending?

No. I think, Mike, that we continue to evaluate the right business for us to be in from that standpoint. Obviously, credit quality is something that we continue to be very mindful of from that perspective. So as opportunity becomes more apparent or comfortable to us, we'll take advantage of that. We have the resource, the balance sheet and the capital to be able to do that.

I'm not sure what the non-investment-grade thing is. But we're a middle market bank. We have a lot of club deals where there are 2 or 3 banks and small credit. Those tend not to be investment-grade types of borrowers. And we're not lenders to GE, and we're just not -- we don't play in that space to a great extent with the billion, multi-billion-dollar AA credit facility.

And to that point, Jeff, as you think about our participation, particularly in the club deal portion of the space, we do have a very significant focus in thinking about it in terms of overall relationship lending, so we look closely at not only the credit portion of the relationship, but also the noncredit portion of the relationship to make sure we're getting the right level of returns.

All right. Thank you.

Your next question comes from the line of Todd Hagerman with Sterne Agee.

Just wanted to follow up on the loan growth question. Kevin, it seems like a lot of the emphasis is kind of the second half of the year in terms of loan growth expectations. But there does seem to be several moving parts. Could you just kind of flush out a little bit more in terms of -- as you mentioned before, I think, Dan, you mentioned just the paydowns and the effect that they're having and then how the -- in terms of your decision on the mortgage production as well as again this capital market syndicated lending, how that's influencing your loan growth expectation for the back half of the year?

I'll start, Todd, and then I'll turn it to Dan or Mary to chip in. Because, I guess the things that we would emphasize is we feel very good about our loan originations. That pipeline and that activity really has continued for us for the last several quarters, and we have high expectations that, that will continue. I think the thing that did surprise us was the capital markets activity and the level of paydowns. The good news is we don't think -- we aren't seeing a migration of wholesale customers from that perspective. We are seeing a lot of activity on that basis in terms of paying down some of that debt. We would have expected that to dip into some of the deposit framework. That hasn't happened at this stage, so we're still seeing that. Although the other positive from our standpoint is we did see a second quarter, albeit very slight, continued increase in line utilization. So those are the trends on a macro basis. I'll give it to Dan to talk a little bit about kind of our orientation. Our expectation is -- we kind of indicated is we feel very comfortable about what we control, again, which is our originations and being front of the market and taking share. We assume that some of the speed with which those paydowns have occurred will begin to stabilize or slow, and that will be beneficial to us and our balance sheet going forward. I don't know, Dan, if you got anything else to add as a flavor to that.

Probably not a lot. I guess I would just re-emphasize from the perspective of paydowns and payoffs, we have seen that activity be fairly high in the last several quarters. Typically, we would see a drop in the level of refinancing types of activity in the first quarter, and we didn't see that in the first quarter. That being said, I think capital markets conditions in the latter part of the quarter were not quite as strong as they were in the first part of the quarter. I think overall, we would expect that while refinancing activity will remain elevated, that it will lessen somewhat from what we saw in the first quarter. And I think that's 1 of the things that -- it kind of underlies kind of our bullishness with respect to loan growth expectations for the second half. And as Kevin said, the things that we can control relative to pipelines, our competitiveness in the marketplace, originations and the fact that we're not losing a lot of customers are all the things that we see as positive and kind of underlie the positiveness of our outlook there.

Just so I'm clear, so the capital markets necessarily is not expected to consume a larger portion of the mix in the back half of the year necessarily, that you're still comfortable with kind of the, as you say, what you can control at your end on the originations side.

Yes, I guess the best way we could kind of convey that to you, Todd, is that we would expect that those most capable and eligible to participate in that paydown and repricing of their debt have probably stepped forward from that standpoint. So if the environment changes dramatically, we'll let you know. But that's what we are seeing at this point.

And then if I may, just outside of that with respect to just the underlying economic activity in the quarter, a number of institutions have talked about kind of the notable slowdown, particularly in the back half of the quarter and you made some reference to it. But within your market and again, you talked about some of the positive macroeconomic drivers that you're seeing within the Midwest. Is that kind of adding to the confidence? Or is it just kind of just hope and a dream that the demand is going to once again pick up here after a slow start?

We have eliminated hope and dreaming from any forecasts just to start with, Todd. I can't bear that.

That's encouraging.

But what I would tell you is, look, a lot of our confidence comes really directly from the marketplace relative to our conversations with clients and their expectations. And I would tell you that, we -- and maybe it is predicated or predominated because of the manufacturing orientation in our footprint. But we're hearing clients being cautiously optimistic, nothing ridiculous or absurd. And I don't think we've given you guidance to that end. But I think you've seen in terms of what we printed, our expectation is that continues at the slow and steady pace that it has started. The other factor, as you might imagine, is it's getting more competitive out there. We're working hard to maintain our disciplines throughout the entire scheme of our asset classes. That's particularly, probably relevant in auto today because there are new players, new entrants coming back into that space where we never left it. So those are the -- that's the battle of everyday that we compete with. But I would tell you that our customers are feeling better than they were last quarter, and we think they'll feel better next quarter than they do this quarter. And that's where it comes from.

Terrific. I really appreciate the color. Thank you.

And your next question comes from the line of Ken Usdin with Jefferies.

Just a question on fees, a question on expenses. In terms of the outlook for fees, I was wondering if you could just kind of help us understand, is this mortgage still reset further and that's offset by core growth on the other lines, like you mentioned in processing? I guess the main question is, what do you expect the mortgage business to do? And what does your pipeline look like?

From a mortgage perspective, I think we did see things pick up a bit towards the end of the quarter. We expect some seasonal increase in the level of mortgage activity. And as we commented in our remarks, overall, I think we expect mortgage revenues to be up, maybe $10 million in the quarter, so not a tremendous rebound in mortgage, but we don't see that declining further in the second quarter.

On the expense side, can you talk about also on the increase a little bit? Not that you had any real 1-timers in the first quarter, but can you just remind us again here how much expenses were seasonally impacted by FICA tax-related stuff? And what area do you expect to see growing within expenses? I think you typically do have more of a first to second decline.

I think overall, we've been very pleased with expense performance. We were down about $70 million between quarters. Some of that is the credit-related piece of that, which I think was about $30 million. But that leaves about $40 million of decrease that's noncredit related. And as you point out, the seasonality of some of the payroll taxes probably cost us about $20 million or so in the first quarter. So other than that item, we've seen about $60 million of other decline. And I think that's a combination of some items that are tied to revenues. So we do see some lower levels of incentive compensation and so forth, particularly with respect to the mortgage business, but also just good broad-based expense discipline, which we continue to have, particularly in this environment.

I guess, with $20 million of seasonal stuff in the first that you're still kind of in a good underlying cost number, but you're still expecting some growth in the second. I guess what's replacing that seasonal decline is my other question.

Maybe the simplest way -- this is Jeff. This quarter, we had $30 million of credit-related costs. They've been running more in the $50 million, $55 million range. And we released $14 million, I think, in repurchase reserves this quarter. We wouldn't expect to replicate that. So that $14 million, if that goes to 0, that's $14 million of growth right there.

I'm sorry, just to come back to the fee side, but if you're expecting mortgage to be up, then I guess what are the other things that would be coming down against on the fee side, because usually you have also a better second quarter in service charges and the like as well at some core businesses?

Dan, I think, walked through and maybe I don't want to do it again -- but in the transcript and we walked through every single fee line item and what our outlook is.

I'll re-read that. Sorry about that.

And your next question comes from the line of Chris Gamatoni. [ph] Unknown Analyst - : Thanks for taking my call. Most have been answered. I guess -- what do you view kind of your normal reserve level? I'm a little surprised how high -- not high, but relatively high compared to 170% coverage ratio on your provision in each quarter. Where can we look at that going forward?

We've talked a bit about this in the past, and it's difficult, I think, to predict where reserve levels will end up overall. But I think 1 of the things we've talked about in the past is that from a historical perspective, reserve levels have been maybe 1% in the best of times, 1.5% in other times. And that we would expect that, that would shift northward maybe to 150 to 200 basis point range rather than 100 to 150. A lot of that depends upon kind of where loss rates settle out, what the new normal looks like s well as potential changes in kind of where loss rates settle out, what the normal looks like, as well as potential changes in kind of accounting rules and regulatory interpretations and so forth. But I think we've talked about 200 basis points as being maybe what an expectation might be as to where the reserve might trend to based on what we know now.

That'll be an expectation that seems as good as any, because we don't have clarity within a great degree on that. Unknown Analyst - : And kind of a follow-up. Just as it relates to allowance to NPLs, do you think that's more indicative of keeping the balance high relative to loans, or it's just -- it's 2x to 3x higher than the majority of your peers with similar books. So I'm always trying to wrap my head around why your ratio is so much higher than the rest in the industry.

Our reserving methodology takes into account a lot of factors. 1 is I think that we have -- we were prudent in building reserves. We've seen some increase, excuse me, some improvements in our overall level of NPAs which has impacted that. But by and large, other factors are what drives our reserve models and our expectations, and I guess all I can say is that we feel that our reserves are conservative and prudently stated. And we take those things into consideration as we go through our models each and every quarter. I can't really comment on what other people's models are and how they're arriving at their numbers, but we believe our reserve levels are appropriate.

The other thing I would add to that, when you think about that ratio in particular, keep in mind that at least in recent quarters we've also taken some special credit actions that had the effect of reducing our level of nonperforming loans. So that's also a factor, at least in the recent quarters, to consider as you look at that ratio. Unknown Analyst - : Okay. Thanks.

Thanks, everybody. Appreciate it. Talk to you next quarter.

This concludes today's conference call. You may now disconnect.