Fifth Third Bancorp (FITBI) 2010 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Fifth Third Bancorp first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Jeff Richardson you may begin.

Thanks. Hi everyone thanks for joining us this morning. We'll be talking to you today about our first quarter 2010 results. This call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to our financial conditions, results of operation, 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 these factors in our forward-looking cautionary statement at the end of our earnings release and 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 Chairman President and CEO, Chief Financial Officer, Dan Poston, Chief Risk Officer, Mary Tuuk, Treasurer, Mahesh Sankaran, and Jim Eglseder, of 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.

Thanks Jeff. Good morning and thanks for joining us. I'll make some opening comments and then hand the call over to Mary and Dan for a more detailed discussion of our credit and financial performance. Overall results continue to show good progress in both credit trends and continued operating momentum. Credit results were significantly better in the first quarter following improved results in the fourth quarter as well. On a sequential basis net charge-offs were $582 million, down $126 million from last quarter, NPAs were down $115 million and loans 90 days past due were down $131 million. Commercial NPL inflows of $405 million fell roughly $200 million on a sequential basis. Consumer inflows of $137 million fell by $15 million. So good positive momentum in all three of the key credit metrics. Our current expectation is for net charge-offs to be down again next quarter by another $100 million or so with $15 million to $20 million of that coming from consumer, and the rest in commercial.

Our outlook for the year generally is for stable to improving credit results although we may see particular credit metrics bounce around from quarter to quarter, that assumes the economy continues to cooperate. Our reserve position remains strong at 4.9% of loans and 139% of NPLs. Given the trajectory of delinquency and loss trends we currently expect loan loss reserves to decline beginning in the second quarter. Obviously we'll have to evaluate reserves in the context of actual credit trends at the end of the quarter, the modeling of reserves is fairly complex as you know and the results of that exercise is not something I can really predict as we stand here today. We'd expect the need for reserves to decline over time provided that loss content in the portfolio continues to improve and assuming economic conditions remain consistent with our current outlook.

Let me give you some high level operating results. Our pre-tax preprovision net revenue came in better than expected rising $6 million on a sequential basis to $568 million. PPNR is up 11% on a reported basis from the first quarter a year ago. That growth was 15% excluding revenue and expenses. We deconsolidated in the processing transaction a $54 million pre-tax BOLI charge last year and securities gains and losses from both periods. That is a strong result over a pretty challenging time period. We currently expect second quarter PPNR to be consistent with our first quarter and Dan will talk more about the components of our operating expectations in his remarks.

The net interest margin increased 8 bips sequentially coming in at 363 and net interest income increased $19 million sequentially. Fees of $627 million were down $24 million sequentially. That reflects typical seasonality as well as a number of moving parts which Dan will outline. Underlying free trends however remain favorable. Average transaction deposits were up 9% on a sequential basis with about $700 million of growth in DDA balances and $3.2 billion of growth in interest checking. Our strong deposit growth and muted asset trends have created liquidity. Funding was down $1.9 million sequentially and $14.7 billion on a year-over-year basis. Credit related cost recognized in revenue and expenses remained elevated. They totaled $92 million this quarter compared with $103 million last quarter and $155 million in the third quarter of '09. We built our reserves for mortgage repurchases by about $25 million this quarter which was offset by gains on loan sales. Otherwise, credit costs were down modestly this quarter and Dan will discuss those moving parts in more detail.

We continue to make progress on our customer satisfaction initiatives. Survey results put our satisfaction at the top of the industry. I think we are seeing tangible results from these improvements. We are now averaging more than four products per retail customer compared with less than three a couple of years ago. We ranked first in the nation for the sixth straight month in mortgage refinance retention. That is when our customers refinance their mortgage, they did it with us. As we continue to implement new technology and processes, we are confident that we can continue our household penetration and profitability results even further.

This quarter's results are starting to reflect in a significant way the actions we've taken over the past two years to improve our underwriting and management of credit and to identify and address problems. I believe we'll continue to see progress both on the credit front and from operating results. The economy has improved from last year although growth is not great and unemployment remains very high, housing price have stabilized and there is more activity but many borrowers have lost their equity in their homes and they continue to retrench. We haven't seen a pickup in commercial loan demand yet but the rate of decline has slowed considerably. Line utilization seems to have stabilized for us this quarter consistent with fourth quarter levels at around 34%. If the economy maintains its progress, we would expect to begin to see growth soon. Consumer spending has started to pick up a bit and that is a key element in increasing business confidence. That being said there are a number of items on the horizon that could have a meaningful impact on the industry. The upcoming financial reform bill in congress, Basel III and other regulatory changes all have the potential to impact industry pricing. We support many of the proposals and support industry efforts to improve others. That being said we are going to focus on what we can control.

Continued focus on credit quality, aggressive portfolio management and loss mitigation strategy, executing our our customer satisfaction initiatives and improving customer loyalty, enhancing the breadth and profitability of our offerings and relationships through holistic relationship management and making Fifth Third an employer of choice in the industry by continuing to enhance the engagement of our employees. On that note I'd like to thank Fifth Third employees for their focus and dedication both in helping us to address the issues presented over the past couple of years from a credit standpoint but also in staying focused on blocking and tackling and continuing to generate strong operating results. Hasn't been easy and I'm proud of what you are doing for the Company. With that, let me turn it's over to Mary to discuss credit results in more detail.

Thanks Kevin. As Kevin discussed overall credit trends were better than expected. I'll get started with charge-offs. Total net charge-offs of $582 million decreased $126 million sequentially with commercial charge-offs accounting for all of the improvement. First quarter results included $26 million in charge-offs we recorded in moving loans to held for sales. While charge-offs remain elevated in Michigan and Florida, losses in Florida were significantly lower than in the fourth quarter and losses in Michigan continued to show signs of stabilization with charge-offs relatively flat versus the fourth quarter and third quarter levels.

Commercial net charge-offs were $342 million versus $468 million last quarter, down $126 million. The biggest driver of the decrease was Florida, down $93 million. Commercial charge-offs in Michigan were down $8 million and the rest of the footprint was down $25 million combined. CNI net losses this quarter totaled $161 million, down $22 million with a sequential decline attributable to a broad based industry segment. Michigan and Florida accounted for 44% of CNI losses during the quarter while representing 22% of CNI loans. Florida losses were down sequentially. Commercial mortgage losses of $99 million decreased $43 million from the fourth quarter with Michigan and Florida contributing 53% of losses although losses were lower in both states. Commercial construction net charge-offs were $78 million down $57 million from the fourth quarter with Michigan and Florida both down but still generating 40% of losses. Across the portfolio home builder developer losses totaled $81 million, down $29 million from last quarter. You recall that we suspended home builder originations over two years ago, have already recorded significant charge-offs against that portfolio and worked to reduce our exposure. Portfolio balances declined $239 million sequentially to $1.3 billion which compares with a peak balance of $3.3 billion back in mid 2008. We expect losses from this portfolio to continue to decrease over time.

As Kevin noted earlier we expect commercial net charge-offs to come down again in the second quarter. Our current outlook would be down about $75 million to $100 million with lower charge-offs in both CNI and commercial real estate. Turning to the consumer portfolio, net charge-offs of $240 million were flat compared with the prior quarter and included the affect of about $5 million in charge-offs on loans consolidated under FAS 167. Looking at individual product lines. Net charge-offs on the residential mortgage portfolio were $88 million, an increase of $10 million from the fourth quarter. Florida accounted for 53% of losses from 28% of the total mortgage portfolio. Home equity losses decreased $9 million sequentially to $73 million including $29 million of losses in the brokered portfolio. The net charge-offs for broker home equity was about 6% annualized which is almost 4 times the loss rate on our branch originated book. The broker equity portfolio is $1.9 billion down from about $3.5 billion a couple of years ago and it continues to run off. Auto and credit card net charge-offs were both relatively flat compared with the third and fourth quarter of 2009. Auto charge-offs included $4 million in charge-offs from loans consolidated under FAS 167.

Looking forward, we expect credit card charge-offs to continue to trend with the unemployment rate and we'd expect auto charge-offs to begin to decline modestly reflecting improved underwriting and better value received at auction. We expect second quarter consumer charge-offs to be down about $15 million to $20 million give or take. Beyond that, current migration trends and expectations would suggest that consumer losses should remain pretty stable over the remainder of 2010. Delinquency trends remain favorable in each of the four main consumer loan categories as I'll discuss later. Now moving on to NPA. NPAs including held for sale totaled $3.4 billion at quarter end, down about $100 million or 3% from the fourth quarter. Excluding $243 million of NPAs in our held for sale portfolio, where the loans have been fully marked portfolio NPAs totaled $3.1 billion. Portfolio nonperforming loans were down over $200 million sequentially, a 7% decline while OREO was up about $100 million largely commercial OREO.

That was a really positive move for non-performing loans and as you would expect, we are seeing some continued growth in OREO which represents the culmination of treatment strategies on problem loans without having moved into non-performing status in the year ago time frame. I would note that only 10% of our OREO has been carried as OREO for more than 12 months. Overall Florida and Michigan remained the most challenged geographies from an NPA standpoint and accounted for 45% of NPAs in the portfolio. Portfolio commercial NPAs declined by $126 million or 5% from the fourth quarter which was a bit better than we originally expected. Commercial construction was the biggest driver with NPAs down $138 million or 20%. Florida and Michigan accounted for almost half of the decline. Commercial mortgage NPAs up were $17 million. Increases in Florida and Michigan offset improvement in most other geographic areas. CNI NPAs were up $7 million from the fourth quarter with an $18 million increase in Florida more than offsetting general positive variances across the footprint.

Across the portfolios, residential builder and developer NPAs of $520 million were down $28 million sequentially and represented 21% of total commercial NPAs. Within NPAs commercial TDRs on nonaccrual status decreased to $39 million from $47 million last quarter. We expect to continue to selectively restructure commercial loans where it makes good economic sense for the bank. We currently anticipate commercial NPAs to remain relatively stable in the second quarter. The significant decline in 90-day past due credits which I'll talk about in a moment is a good development in that regard. Liquidity has improved from moving distressed assets and we may choose to utilize that avenue more frequently if terms become more favorable. In terms of our commercial held for sale portfolio, total held for sale NPAs of $243 million were carried at $0.32 at the $1 at the end of the quarter. Of the $473 million we originally transferred in the fourth quarter of 2008 $169 million remain and has carried at $.30 on the $1.

During the quarter, we transferred $80 million of additional loans into held for sale, the majority of which were either sold or are under a contract or letter of intent to be sold. Those loans sold or under contract for sell were marked at $0.51 on the $1 relative to their original balance. On the consumer side, NPAs totaled $715 million at the end of the quarter, a $10 million or 1% sequential increase from the fourth quarter. Non-accrual consumer TDRs accounted for $13 million of the increase with the remainder of the consumer NPA portfolio declining $3 million. Residential mortgage NPAs decreased $2 million during the quarter to $521 million with TDRs up $5 million sequentially and the remainder of the portfolio down $7 million. Home equity NPAs totaled $70 million at the end of the first quarter, down $1 million from fourth quarter level. Auto NPAs were down $1 million and credit card NPAs were up $14 million with the increase attributable to TDRs.

Looking forward for consumer NPAs, we expect second quarter growth to be modest and generally consistent with first quarter trends. Consumer NPA trends will continue to reflect the seasoning of more recent TDRs as well as the favorable delinquency and migration trends we have been seeing. In terms of overall consumer TDRs we have $1.8 billion of TDRs on the books of which $1.5 billion are accruing loans and $271 million were non-accrual at March 31. About a quarter of the loans we restructured to date have redefaulted. On a lag basis redefault rates are just under 30% on modified loans which is a bit better than industry data. We have updated our vintage default rate curve so that you can see the tendencies towards default by vintage.

More recent vintages have shown lower default rates than loans we restructured earlier in the cycle and also constitute a larger proportion of the aggregate TDR pool. I would like to spend a couple of additional minutes discussing a few nuances of the TDR process that are probably worth mentioning. If a loan has an interest rate concession made on it relative to market rate, it usually will remain in the accruing TDR bucket until it matures. As a result, TDRs will increase for us and for the industry as long as we continue these types of modifications. What is important to note is that of the $1.5 billion of accruing TDRs we had at the end of the quarter $1.3 billion are current and of those over $900 million are current and were restructured more than six months ago. In the case of that $900 million, the vast majority will stay current but many will remain TDRs indefinitely because we made an interest rate concession and therefore they can't be removed from the TDR category. We provided some aging data in our credit presentation that indicates the age of our TDRs and what proportion is current or delinquent after varying lengths of time. For most of these loans we took our losses up front when we modified them and from that point on they'll perform just fine.

Overall, we continue to be pleased with the results of our loss mitigation efforts. And I think the information we provided demonstrates that they are working and improving. Hopefully this data provides you with the information you need to do your own evaluation of how to view these credits.

Let me stop for a minute and point you to the roll forward of our non-performing loans that was added to our credit trends presentation that was included in the materials we released this morning. I would point to a couple of trends worth mentioning. The first is that our commercial non-performing loans inflows were the lowest we have seen in quite sometime at $405 million which compares with $602 million last quarter and a quarterly range of about $550 million to $830 million in 2009. On the consumer side, inflows totaled $137 million which was down $15 million on a sequential basis and the lowest since the second quarter of 2009. Total inflows were $542 million, down from $754 million last quarter and the lowest we have seen since 2008.

To wrap up the NPA discussion, we've been proactive in addressing problem loans and writing them down to realistic and realizable values. Total NPAs commercial and consumer, are being carried at approximately 59% of their original face value through the process of taking charge-offs, mark and specific reserves recorded through the first quarter. We believe that's appropriate and I think our recent charge off trends continue to be indicative of lower severities on new NPAs and reasonable carrying values overall. Moving to delinquency trends.

Commercial loans 90 days past due were $120 million and dropped 40% or $78 million from the fourth quarter. Commercial loans 30 to 89 days past due were $401 million and increased by $34 million from the low levels experienced in the fourth quarter. As we discussed last quarter, consumer delinquency trends overall have continued to moderate. Three key drivers are those trends are the seasoning of loans made in 2005, significant underwriting improvements in home equity and auto portfolios, and the run off of mortgages due to our 95% salability strategy. These factors are having an increasing impact on the performance of the portfolio. Consumer loans over 90 days past due were $316 million, down $53 million with Florida representing the largest decline for the fourth consecutive quarter. Consumer delinquencies 30 to 89 days past due decreased 2% sequentially to $516 million.

Total delinquencies this quarter were down 15% from last quarter and were at the lowest level since mid 2007. We believe we are seeing signs of stabilization and don't currently expect significant movement next quarter although delinquencies can move around a bit given seasonality and timing issues.

A couple of comments on provision and the allowance. Provision expense for the quarter was $590 million and exceeded net charge-offs by $8 million. The allowance was also increased by $45 million as a result of the consolidation of off balance sheet asset. Our allowance coverage ratios remained strong covering non-performing loans by 139% and first quarter annualized net charge-offs by 161%.

One last item before I turn it over to Dan. We've updated our stress test model to give effect to actual results and recent trends as well as changes to forecast for the macro economy. Those macro forecast are derived from Moody'seconomy.com base case and recession case scenarios. We've provided the results of those models and macro assumptions once again in the credit trends presentation. You'll note that the results are better than those we provided in January reflecting several factors. There's been some improvement in the macroeconomic assumption. Also first quarter results were generally better than expected in January and the adjusting for the effect of the improvement we have seen in results, roll rates, et cetera is reflected in remainder of the year expectation. As you'll see, under the updated best case scenario, losses would be expected to remain significantly below our 2009 losses. In both the new best case and recession case remains much better than the up cap adverse scenario results and the recession case is actually more consistent with our baseline at cap submission. With that, I'll turn things over to Dan to discuss operating trends Dan?

Thanks Mary. As Kevin and Mary have discussed, we are seeing a lot of positive momentum in both our credit trends and our operating trends. For the quarter we reported a net loss of $10 million and pay preferred dividends of $62 million which resulted in a loss of $72 million on an available per common share basis. Last quarter our net loss was $98 million or $160 million to comp. The biggest driver for the improvement was clearly lower provision expense which was down $186 million on a pre-tax basis. However, there were other major themes for the quarter. The first was improved net interest income and net interest margin. NII increased by $19 million sequentially and NIM grew 8 basis points to 3.63%. The second was a decline in fee income although less than expected which was down $24 million. There were a number of items in both fourth quarter and first quarter results that affected that and I'll talk about those later.

Underlying fee trends remain consistent with our expectations and are favorable although Reg E will create a bit of head wind for fees in a couple of quarters. The third was continued deposit growth average core deposits grew by 6% sequentially and 14% on a year-over-year basis with strong growth and transaction account. Wholesale funding fell by another $2 billion sequentially and $15 billion on a year-over-year basis. Our liquidity position remains very strong core deposits continue to fund 100% of our loan portfolio. And last was lower non-provision credit costs. Compared with last quarter credit costs recognized through fee income and operating expenses were down $11 million and totaled $92 million. Gains on loan sales offset increased mortgage repurchase expense and we experienced improvement in OREO expense, losses on OREO sales, and work out in collection costs.

With that context let's go through the balance sheet in more detail. Average earning assets were up 2% compared with last quarter but were down 3% on a year-over-year basis. This trend continues to be driven by weak loan demand particularly on the commercial side. During the quarter we adopted FAS 167 which increased earning asset by $1.3 billion on a net basis. In terms of the balance sheet geography of that, this reduced available for sale securities by $1 billion while on the loan side it increased CNI loans by about $700 million, auto loans by $1.2 billion and home equity loans by $300 million. Loan balances were down slightly net of the impact of FAS 167 although we have seen a notable deceleration in the rate of decline and we currently expect that to turn positive as 2010 progresses.

As Kevin noted commercial utilization remains consistent with the fourth quarter after four quarters of consecutive declines. Right now we'd expect loan balances to be relatively stable in the second quarter but to see some modest growth in the second half of the year as business investment and working capital needs begin to reflect economic trends. Average commercial loans were flat compared to the fourth quarter with the effect of charge-offs and weak loan demand offsetting impact of FAS 167. Average consumer loans increased 3% sequentially although they were down 1% compared with the year ago. Auto loan balances increased 14% from last quarter and 17% compared with the first quarter of 2009. Excluding the impact of consolidation, balances were up about $100 million sequentially. Credit card balances were down 2% on a sequential basis and up 6% year-over-year. Home equity loans were flat sequentially and down 3% on a year-over-year basis. And residential mortgages were down 7% from the fourth quarter and 13% from a year ago as we continue to sell most of our new production.

Flow sales during the quarter were $3.3 billion. Average securities increased by $1.7 billion during the quarter driven by excess liquidity. Short-term investments primarily held at the Fed increased an average of $2 billion. The remaining $300 million decreased in securities reflect the consolidation of our off balance sheet conduits and the reduction in variable rate demand notes which combined to reduce securities by about $1 billion. That more than offset the full quarter effect of mortgage backed securities that were purchased in the fourth quarter.

Now moving on to deposits. We saw continued strong deposit momentum this quarter with a continued positive mix shift toward lower cost deposits. Average core deposit growth was 6% sequentially and 14% on a year-over-year basis. Transaction account balance growth remained strong. DDA balances were up 4% sequentially and 21% year-over-year while interest checking deposits increased 20% from last quarter and 37% on a year-over-year basis.

Retail core deposits increased 1% sequentially and increased 3% year-over-year. Our net new account production was double the level we seen in the first quarter of 2009 and was driven by our new relationship savings product that provides greater value based on the depth of a relationship a customer has at Fifth Third. We also saw 3% sequential growth and average retail deposit account balances which is atypical for the first quarter and it is driven by the migration of our deposit book from products like free checking into more relationship oriented products as well as higher consumer savings levels overall nationally. Total commercial core deposits were up 20% sequentially and 46% from a year ago. Growth has been driven primarily by higher average balances which reflects cautiousness and excess liquidity among our customers. Commercial DDAs increased 8% and 46% year-over-year while commercial interest checking increased 39% sequentially and 89% from last year. As we noted last quarter public fund balances have driven a significant amount of recent growth. We expect core deposits in the second quarter to be consistent with the first quarter as additional growth is offset by the effect of federal tax payments and lower public funds balances after tax season.

Let me make a few comments on FTPS. At the beginning of the year the majority of FTPS employees were officially transitioned to the joint venture and off our payroll. That drove a reduction in transition services agreement or TSA revenue as expected from $39 million last quarter to $13 million this quarter. And that's recorded in other non-interest income in the income statement. That revenue covered costs of a similar math that we incurred each quarter to provide those services to the processing JV. That $13 million number is probably a good quarterly run rate for the rest of 2010. Finally we recognized equity method income of $5 million related to our 49% interest in the joint venture through the other income line item which compares with about $8 million last quarter.

Now moving on to the income statement starting with net interest income. NII on a fully taxable equivalent basis increased $19 million sequentially to $901 million. We continue to see the benefit of the shift toward lower cost deposits as well as wider loan spreads. The total cost of interest bearing liability spelled 10 basis points sequentially while average loan and lease yields expanded 10 basis points. The adoption of FAS 167 also contributed about $10 million to net interest income as we expected. Net interest margin increased 8 basis points to 3.63% driven by the factors I just outlined. With the consolidation of assets having no real meaningful impact on NIM.

Second quarter NII and NIM will be negatively affected by premium amortization on delinquent mortgage securities repurchased by Fannie Mae. That one time negative impact in the second quarter is about $10 million to NII and 4 basis points to NIM. Despite that we currently expect second quarter NII and NIM to be consistent with the first quarter or perhaps up modestly. We currently expect NII and NIM tends to be remain favorable in the second half of the year.

Moving on to fees, first quarter non-interest income was $627 million, down $24 million from last quarter but significantly better than we expected. Results reflected three items that I want to comment on. First as I noted TSA revenue was $13 million this quarter versus $39 million last quarter due to the year end transfer of employees to the JV. Second we had a $2 million negative valuation adjustment on our warrants and FTPS and that compares with a $20 million gain on that same item last quarter. And third we had a $9 million negative valuation adjustment on the total return swap related to estimated visa litigation expense and that swap was part of the sale of our Visa shares last summer. Those items add up to a negative swing of $57 million between quarters. Excluding those factors fee income was up $33 million or 6% with negative effects of seasonality more than offset by higher mortgage banking revenue and lower credit related costs realizing non-interest income.

Corporate banking revenue of $81 million was down $8 million from the fourth quarter or 8% sequentially as we expected. Results in this line are correlated with commercial loan origination volume which has been weak. We expect modest growth in the second quarter in this area. Positive service charges were down 11% from the fourth quarter and 3% from a year ago. Commercial deposit fees were down $4 million and consumer deposit fees were down $13 million on a sequential basis. About half of the decline in consumer fees was related to seasonality with the remainder due to lower overdraft activity. Last quarter we stopped charging for overdrafts under $5 and this is the first full quarter of the impact from that change. We would expect normal positive seasonality as well as additional account growth to drive an increase in consumer service charges in the second quarter perhaps $10 million to $15 million or so.

One event on the horizon for the industry is the upcoming change to overdraft charges or Reg E. It's difficult to estimate the effect of this change given that they depend on future customer choices and behavior but let me take a stab at it. We currently estimate the impact of Reg E to be about $20 million per quarter with about $10 million to $15 million of that being realized in the third quarter and the full run rate of $20 million impact in the fourth quarter. We've been proactive in developing deposit products that generate alternative revenue streams through voluntary customer adoption which we think is preferable to both us and to our customers. We've had a lot of success in fee based model products like our secure checking and rewards checking products. We also believe that a number of our customers will elect to set up overdraft protection by linking their checking account to a savings account, credit card or home equity line.

We have seen this on the horizon for a while. We were one of the first banks to stop offering a totally free checking account and we've absorbed some of the impact of that already and we work continually to proactively develop new value added products to help mitigate the impact of these developments. Investment advisory revenue increased 5% sequentially and 14% on a year-over-year basis. Recent market performance has benefited the trust, asset management and brokerage groups. The first quarter also benefit seasonally from tax preparation fees and thus we expect this line item to be relatively flat in the second quarter. Card and processing fee income was down modestly on a sequential basis coming in at $73 million for the quarter which compares to $76 million last quarter. That was a good result given the seasonality we experienced in the first quarter of every year.

Net mortgage revenue of $152 million was up $20 million from last quarter. That included the benefit of gains on MSR hedges of $51 million. Right now we expect net mortgage banking revenue to decline by $25 million or so in the second quarter. This is probably the fourth or fifth straight quarter we've predicted lower mortgage banking revenue but I've decided -- I'm going to keep saying it until I'm right so that is our guidance again this quarter.

Credit related costs recorded in fee income were just $1 million for the first quarter down from $30 million last quarter. The biggest driver of the improvement was $25 million in gains on loan sale. Next quarter we'd expect to see those costs closer to $25 million which is primarily the ongoing effect of losses on OREO sales. As a result, we expect the line item other non-interest income to be about $25 million lower in the second quarter than the first. This line can move around some but that is our current expectation. We currently expect fee income in the second quarter to be about $600 million give or take. We expect the sequentially decline to be driven primarily by lower mortgage banking revenue and higher credit cost realizing fee income but that should be partially offset by generally stronger quarter from the seasonality perspective.

Turning to expenses. Non-interest expense of $956 million was down $11 million or 1% sequentially. On a positive side, TSA expenses were down $26 million and litigation expenses were down $18 million. On a negative side FICA and unemployment benefits expense was up $16 million seasonally and credit related expenses were up $18 million. Net of those items noninterest expenses were flat. In the first quarter, credit related costs within operating expenses were $91 million compared with $73 million last quarter. The increase was driven by higher expenses related to mortgage repurchases, $39 million this quarter compared with $18 million last quarter. I would note that the majority of that expense was related to a repurchase reserve bill, actual realized repurchase losses were consistent at $13 million this quarter versus $14 million last quarter. We would expect the repurchase expense to be about half of that $39 million level next quarter maybe something in the $20 million range and for total credit related costs recognized in expense to be down $20 million to $25 million as a consequence.

Along with the industry we have seen an increase in mortgage repurchase requests in the past couple of quarters. Spiral request trends seem to be stabilizing and while we currently expect demands for repurchases to remain at an elevated level, that file request activity trend suggest that demands and realized losses in the near term should be generally consistent with first quarter levels. Total repurchase reserves are about $80 million against losses realized in the first quarter of $13 million so we think we are in pretty good shape here. In terms of overall expense expectation for the second quarter, we'd expect non-interest expense to be down $10 million to $15 million driven by lower benefit expense and lower credit related costs partially offset by the ongoing effect of investments in strategic initiatives.

Let me stop for a moment and just do a quick recap of PPNR. Reported pre-tax preprovision earnings were $568 million in the first quarter. Our current expectation is that second quarter PPNR will be consistent with the first quarter with mortgage banking revenue down about $25 million but with that being offset by growth in NII and other fee income lines as well as lower expenses. Let me spend just a minute on taxes at our current level of earnings which are very close to zero it can be difficult to estimate the expected tax rate. Given the effect of our tax credits which we estimate to be bout $125 million a year, we expect our full year tax rate to be below 10% and the second quarter should be in that ballpark as well. The first quarter tax rate was 53% but that rate is not very meaningful given the level of our earnings are so close to break-even.

Now moving on to capital. Our quarter end capital ratios remain strong. The TCE ratio was 6.4% excluding $288 million of unrealized securities gains on an after tax basis. Tier 1 common equity was 7% and tier 1 capital was 13.4%. I'd note at that the implementation of FAS 167 led to a $77 million charge to equity this quarter. We currently anticipate that these capital ratios would be stable to modestly higher in the second quarter depending on asset growth. I think with that we'll open it up for questions.

(Operator Instructions) Your first question comes from the line of Kevin St. Pierre with Bernstein.

Good morning. I was just wondering if you could tell us, I appreciated the discussion of potential impact of Reg E, I just wonder if you can tell us of the $142 million in service charges on deposits, how much of that was consumer and NSF fees?

We never disclose that. A little less than half of our deposit service fees are consumer, and then a good portion of that would be overdraft fee.

Okay. So I guess coming a different way of the $20 million range per quarter, is that, can you give us a bit more on your assumptions on opt-in and how much of those consumer NSF fees go away?

The guidance that we gave Kevin of those we really, that's our best estimate right now. There's so much still moving about. I hesitate to give kind of ratios of opt-in and expectations from that perspective. We would like to do a little bit more of the work before we release some of those expectations right now. So there's an awful lot going on as you might imagine in terms of the education of our customers and clients and preparation for execution. So I'll be more confident in talking about that in the next 60 to 90 days.

Okay. On your reserves, net charge-offs were down. Looks like your stress testing your base case range moved down about $200 million or so. Reserve to loans now 4.9%. Seems like everything points to a reserve release and yet you built reserves this quarter. How do you think about this as we move through the year. Should we start seeing matching charge-offs, under provisioning? How do you think about that?

One thing I think it's important to recognize is that stress testing involves estimating future losses based on expected future trends and future events whereas the allowance is driven by Generally Accepted Accounting Principles which is more based on the situation as it exists today without necessarily guessing or predicting what the future will hold. While I would share your views with respect to what the trends look like going forward, that doesn't necessarily fully make it into the allowance methodologies that we are required to have under Generally Accepted Accounting Principles. Those methodologies are generally more backward looking. They are based on historical results tempered somewhat perhaps by recent trends, but we are not permitted under Generally Accepted Accounting Principles to bake into our allowance forecast a lot of expectations about what future developments might be in the economy or for our customers and portfolios.

So as Kevin mentioned in his comments, we do anticipate that reserve levels will begin to come down and that that would likely begin in the second quarter, but at this point it's difficult to put a dollar range on that. That will depend upon our execution of those methodologies based on what trends actually materialize in the second quarter.

Thank you.

Thanks Kevin.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Good morning.

Good morning.

On the restructured loan trends really starting to see some deceleration here. Should we expect that growth rate to continue to slow and also how is the contribution from the Florida residential mortgage portfolio changed within the TDR bucket?

With respect to the restructured loan trends, looking first at the commercial portfolio, you'll see that our overall trend was down slightly. Our overall approach continues to be the same, though. We do look for opportunities to restructure when it makes good economic sense for us and that is typically driven by cash flow trends that we think are strong enough in the long term to drive that kind of an economic decision for the bank and also for the borrower. With respect to our restructuring trends on the consumer portfolio, although we have been an active restructurer if you will of loans over the last couple of years, we do continue to look at our overall strategy in light of where we are at in the credit cycle today versus where we were a couple of years ago and we continue to look at a variety of options to again determine what makes the best economic sense for the bank as well as for the borrower. That would include things like the borrower situation as it relates to a long-term situation as opposed to a short-term situation where perhaps they have got some additional stress in their lifestyle. We'll look at the possibility for extensions of terms. We'll look at the possibility for interest rate concession and in general as we've noted in our credit presentation we've also seen that our restructuring for the later vintages has had a higher performance rate at this point in time. So we'll take all of those factors into account as we continue to evaluate our strategy. Your second question related to--?

Florida residential.

That component of our overall TDR level is declining at this point, and I think that that is consistent with the overall credit trends that we've been recording with respect to the mortgage portfolio as well as the contribution that Florida is making to the mortgage portfolio credit trends.

In some, Craig, I guess the thing that we would kind of indicate to you as things begin to stabilize, as we've kind of indicated, obviously we've done an awful lot of front running work of finding the best economic clients to work with to really kind of restructure those credits, and as it stabilizes you should see less and less of that happening.

And to follow up on Kevin's comments keep in mind that we recognized the issues with Florida real estate very very early in the cycle. So we were aggressive in dealing with those issues particularly with the most troubled components of the Florida mortgage portfolio. So with the benefit of time we are seeing better performance as you would expect because of the aggressiveness of the actions early in the cycle.

Thank you.

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

Thank you very much. I was wondering -- I don't know if you've done this in the past but have you given guidance of where your portfolio is going to end up and also what do you think your core ROA is going to be once we get through the bulk of these credit losses running through the system?

Paul, we've been asked the question about normalized ROA a number of times in the past, and I think we've generally responded that we think normalized ROA for us would be something in the 130 plus range. I think if you look at this quarter's results, for instance, and take a normalized provision level and then just reduce our credit related expenses which were about $90 million some in this quarter, if you reduce that by half, you get the numbers that are north of 1% even before considering any other impacts of the cycle continuing to run and the impact that that has on asset generation and the impact that that has on margins and the impact that that has on fee income growth. So we are pretty comfortable with that range. Obviously in the long run, normalized ROA is going to be dependent upon a lot of factors that are difficult for any of us to predict right now relative to regulation and kind of what the normalized environment looks like as we come out of the cycle. But that's our best estimate at this particular point in time.

And then we've been through so much turmoil in the last couple of years and have seen a lot of volatility in the amount of reserves banks have had to hold over the last two decades, what do you think coming out of this the regulators are going to be comfortable with on the reserve ratio to your loans or is that something that can't be answered at this time?

It's difficult to answer at this time. I think the regulatory expectations about the reserve are not necessarily subject to any defined methodology or set of rules or guidelines. Clearly on the GAAP basis we at least have a set of rules although they are subject to interpretation and there's a lot of judgment involved, at least there is a broad set of guidelines that we have to follow. Regulatory expectations tend to fluctuate somewhat and are more responsive to general economic conditions and what they are trying to accomplish from a safety and soundness perspective. Obviously regulatory expectations would probably be generally higher going forward at least in the short run than they have been historically and that is one element that we'll have to deal with as we move into the future and perhaps there's a divergence of pressure like we saw at the end of the last cycle where the banking regulators had one view and the SEC and the accountants had another view. So that will be attention that may well develop again and we'll just have to see how that tension is resolved in terms of whether any new guidance comes out either from the regulatory side or from the accounting side that guides us in terms of what our reserves would need to be as we go forward.

Paul, the only other thing that I would add, it is highly unlikely that it would be 4.9%.

Yes. I figured that. But the thing is GAAP won the argument before the cries and now it appears the regulators will win the argument after the crisis. Do you think GAAP will really put up a fight relative to the regulators on this? Stop it. You don't have to answer it. Thanks a lot.

I suspect there will be some discussion. Whether it will elevate to the level of a fight or not, I don't know. Perhaps not.

Good quarter. Thanks a lot.

Your next question comes from the line of Brian Foran with Goldman Sachs.

Good morning.

Good morning, Brian.

First to clarify your loan comment the guidance is flat in the second quarter with modest growth in the back half of the year?

True.

Yes.

I guess over the past six quarters it's been pretty tough for the whole industry. What tangible signs are you seeing that give you comfort that 2Q will be the inflection point? Are you seeing utilization rates pick up by month? I guess what are you seeing that gives you comfort putting that guidance out there?

Brian, it's kind of the absence of decline as opposed to growth at this point. So the stabilization is an important movement as Dan mentioned in his commentary. This is the first quarter in four that we have not seen utilization rates decline. That is encouraging to us from that perspective. The only other thing I can point to is really kind of as we talk with clients and as I go across the footprint, there are growing consensus and growing comments made by our clients in terms of comfort about where we are and beginning to look at reinvestment or application of their capital into growth in their businesses. And so again if all things continue moving on the path that I think that we are on as we tried to lay out, I think that gives us confidence that the second half certainly will be better than the first half.

Great. Thank you.

Your next question comes from the line of Bob Patten with Morgan Keegan.

Good morning, everybody. I don't want to revisit the issue on the NSF and I realize you guys are getting as much data as you can but a lot of the banks have been making different comments or maybe comments along the lines that it is something they got to really start to focus on because it's a pretty good margin business. So my thought is if you can get something periodically it would be helpful to the group. Also just comment on the liquidity in the loan sale market, please.

We have seen pretty good liquidity again this quarter. Again, we continue to evaluate that on a sale by sale basis to make sure that our pricing is consistent with the economic objectives that we have. As you saw in our results this quarter we did see some improvement in liquidity which helped us move some additional assets off.

Any sense on accelerating that strategy over the next couple of quarters to get the balance sheet maybe in line?

As liquidity improves, Bob, we certainly want to be in a position to take advantage of that. So if that happens and it's economic to us, yes, you can see us accelerate that.

Kevin, last question. Since we are out there late February, any update on your thoughts around TARP or profitability?

Nothing has changed in our perspective Bob from our comments late in the fourth quarter early part of this quarter. So really no updates from that standpoint. The other thing Bob I just would want to clarify on. Obviously we've spent an awful lot of time and continue to spend a lot of time in terms of retail profitability. We'll have a lot to say at the appropriate time so there's been a lot of really good work and good positioning from our standpoint. As you know we were one of the early ones really addressing that relative to our product offerings and relative to the change from that standpoint. We will have more to be able to articulate in the coming months.

Thanks Kevin.

Hey Bob. One follow up on your question about Reg E. We have done a lot of analytical work to come up with that estimate as Dan said $20 million a quarter full run rate. I don't know that we are going to have an updated view on that. We could, but I don't know why we would until we actually begins to be implemented and customers begin to react. So we will update you if we change our estimate but I don't know that we will have objective data to change that estimate until we actually see it happening.

I understand that, Jeff. I think what we charge is back into the numbered if you start with the $300 million or so in consumer and half of that is OD, you try to back into the numbers where you are getting 20 on a quarterly run rate, that is all we are asking. So at some point maybe we can clarify that.

Definitely.

I would also remind you we are more commercially oriented so we have more proportionally commercial customer base than a lot of our peers and that's something to bear in mind as well.

Good point. Thanks.

At this time we have reached the allotted time for questions. Speakers do you have any closing remarks?

No. I appreciate your attention. Thanks everybody and we'll talk to you next quarter.

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