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…

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…

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…

[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]

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.

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.

Okay. Thanks.

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

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