Fifth Third Bancorp (FITBP) 2005 Q1 法說會逐字稿

Good morning. My name is Deborah and I will be your conference facilitator. At this time, I would like to welcome everyone to the Fifth Third Bancorp first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Brad Adams, Investor Relations Officer of Fifth Third Bancorp. Thank you. Mr. Adams, you may begin.

Good morning and thanks for dialing in. I'm here this morning with Mark Graf and George Schaefer to go over this quarter's results. I would like to remind everyone, before we get started, that this call contains certain forward-looking statements about Fifth Third pertaining to recently completed acquisitions, the financial condition, results of operations, plans and objectives of the Bancorp. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from a historical performance and these statements. Fifth Third undertakes no obligation to update these statements after the date of this call. At this time I would like to turn the call over to George Schaefer, President and CEO of Fifth Third.

Good morning and thanks for taking the time to listen in. I will have a few comments and then Mark will review some of the income statement and balance sheet trends before we open it up for your questions. Regarding the quarter, loan growth was very strong and we expect to maintain low double-digit growth in the near-term. Both consumer and commercial produced good results in the first quarter. First National Florida added 2.8 billion in commercial loans leaving a core growth rate of 14% annualized in the commercial side. And Florida had about 400 million of consumer loans, excluding mortgage, leaving a core growth rate of 8% annualized there. We also saw very good home equity and direct lending results that have been somewhat mitigated by the competitive pressures on the indirect lending side of the business.

On the deposit side, transaction deposit growth was up 8% over last year, and flat relative to the fourth quarter, on a core basis. Typically fourth to first quarter produces very difficult comparisons in transaction deposits with seasonal pressures on commercial demand and escrow related deposits. Overall, we are fairly pleased with the results on the deposit side, but we realize we have a great deal of work to do to get us where we want to be there. On a reported basis, average transaction deposits were up 15% over last year, and 22% on an annualized sequential basis.

Service income trends remained mixed and below our expectations. Our processing business continues to produce excellent results with a 36% growth on a core basis there. Mortgage banking rebounded to a sustainable run rate. Investment Advisors improved from the fourth quarter of last year but remains a bit challenged with weak market performance in the first quarter and headwinds from lower annuity sales. Deposit revenues were essentially unchanged from last year despite some pretty good account growth, due to lower overdraft fees and moderating commercial performance as rates continue to rise and the earnings credits move up. Net interest income trends are impacted by both acquisitions and the timing of transactions, associated with the balance sheet initiatives that we undertook last quarter.

A couple of things to note in your analysis of net interest income. Purchase accounting related amortization was modestly dilutive to net interest income in the first quarter, and earning asset growth was muted in the first quarter following the trades. Swap termination amortization resulted in an approximate $5 million negative comparison to the fourth quarter run rate as well. On the expense side, expense growth was modestly above our initial expectations at about 9% over last year. Almost all of that growth was related to a few factors, most notably, the Florida acquisition, our increase in salespeople throughout all of our markets and lines of business, our information technology expansion, and as we have talked about our de-novo banking center expansion. Mark will give you some more details on the expenses in just a minute.

Credit quality remains well behaved at this point with net charge-offs at 40 basis points. We did, however, see an increase in nonperformers in the first quarter. A couple of additional comments before I turn things over to Mark. First, revenue growth continues to be below our expectations. Recent trends are not something that happened overnight and it's safe to say they won't be turned around overnight either. We believe that we're taking the right steps to drive growth for the future by investing to build the best banks in each of our 17 markets. In some markets that means building more Banking Centers and in others it means hiring more quality salespeople. At the corporate level, we have improved our sales tracking systems, our financial measurement tools, our risk management and our product capabilities. These were very expensive additions but they were necessary to take the next step in our history.

In December, we announced several balance sheet initiatives that, along with the addition of First National, resulted in some uncertainty as to what the core base of quarterly and annual earnings would be for Fifth Third. Recognizing that, we decided to issue earnings guidance for the first time in recent memory. Competitive and economic environments can change very quickly in this business and the decision to give guidance helped create a base of expectations for our shareholders. While we believe the low-end of that guidance remains achievable if deposit growth is strong this year, we will not sacrifice necessary long-term investments just to make a number if deposit growth disappoints.

We still have some work to do, but we like the momentum we're seeing and we believe daily sales execution is at a premium in tough rate environments. We made some difficult decisions over the last couple of years, but I believe that we have the right management teams in place to drive revenue and earnings growth, both at the corporate level and at all of our affiliate banks. We will stay focused on our four core businesses and we are very committed to our affiliate bank model. We remain dedicated to building long-term shareholder value. We will continue to invest in the future, and we will continue to work harder than our competition every day. With that, I will turn it over to Mark for some details.

Thanks George. I will start on the balance sheet and net interest income side. First quarter net interest income was essentially unchanged year-over-year and increased by $7 million on a linked-quarter basis. The net interest margin increased 3 basis points linked-quarter driven by 2 basis points of spread expansion. This is the first linked-quarter spread expansion we've seen in nearly two years. As George mentioned, margin and net interest income trends were impacted by both the timing of the fourth quarter trades as well as the First National acquisition. Transaction deposit growth was good at 8% on a core year-over-year basis. Excellent trends in March were somewhat muted by seasonal factors in demand deposits in January and February.

Across checking products, open-to-close ratios and account growth are exhibiting positive trends but some challenges remain from high balance account attrition. This can be seen in the fact that our de-novo banking centers are continuing to drive the majority of our deposit growth. We are also seeing very encouraging trends in some of our larger markets including both Chicago and Florida. On the asset side, consumer loan growth remained good and commercial loan growth was excellent.

Overall, we remain pleased with the level of loan growth we've seen in recent periods and expect it to continue in the remainder of 2005. This growth is well within the range of our performance expectations. Looking forward, and as things stand right now, we expect to see net interest income trends improve for the remainder of the year. Our expectations for 2005 are loan growth at levels similar to recent periods, net interest margin trends will depend on deposit growth but we don't expect to see significant expansion or contraction in 2005, assuming another 100 basis points of rate increases through the remainder of the year. Margin should increase significantly next year when retail coupons have more meaningfully repriced.

Generating deposit growth continues to being extremely important to fund new assets and we're working very closely with the business lines in order to make sure that they have the pricing and marketing that they need to compete aggressively. We're comfortable with our capital levels at this point and expect that capital will build modestly over the remainder of the year exclusive of mark-to-market impacts. With a change in base case reflective of a higher and flatter curve since we last disclosed at the end of December, interest rate sensitivity disclosures will reflect an essentially neutral year one impact from expected rate increases along the curve, with a year two impact in the neighborhood of a positive 150 to 175 basis points.

On our credit quality front, net charge-offs as percentage of average loans and leases were 40 basis points versus 44 last quarter. On an overall basis, charge-off trends improved significantly as compared to last year. Non-performing assets now stand at 53 basis points as nonperforming loans increased 40 million in the first quarter. Half of this increase is attributable to four credits totaling approximately $20 million and the addition of First National's balance has had some impact as well.

Importantly, we don't view this increase as being indicative of worsening credit trends within the portfolio as a whole and remain confident that credit will be well behaved this year. There were several significant items in the quarter that should also be noted in your analysis of trends both from the acquisition and more generally. First, securities gains were approximately 14 million in the quarter compared to 25 million in the prior year's quarter. In addition, we had about $7 million in acquisition related charges stemming from our acquisition of First National Bankshares of Florida.

And in addition to that, there was approximately another $11 million in costs related to the Florida acquisition that do not qualify for treatment as acquisition-related expenses, if you will. Those would be essentially 4 million in marketing costs incurred to generate brand recognition, 5 million in increased intangible amortization, and 2 million in increased salary expense related to stay bonuses for various First National personnel. In addition there was a modest negative impact to net interest income from net amortization of purchase accounting loan and deposit marks. And finally, employee related expenses were above the run rate due to the timing of conversion activity and headcount reductions in Florida.

Onetime charges realized from the acquisition of First National have been well below our initial estimates at deal announcement and are largely complete at this point. On the expense side, some of the comparisons are more obvious than others. Employee related expenses were up 26 million over last year and 25 million linked-quarter. The linked-quarter comparison largely results from seasonal trends in FICA and the year-over-year is due to headcount additions. Headcount is up approximately 2,700 over last year. A couple of anecdotal points there. Over 2,300 of these heads are revenue producers. Approximately 1,050 were in Florida, both from acquisition as well as hiring. This number should moderate a little as reductions are made and more salespeople are hired. The bulk of the rest of the hires came at our largest opportunity markets. Approximately 1,200 people were added in Chicago, Indianapolis, Nashville, Cleveland, Detroit and Columbus.

The $8 million increase over last year net occupancy expense was driven by the addition of 132 new Banking Centers. Other expense increased $41 million over last year, driven largely by the factors mentioned in the release, marketing, information technology, acquisition-related charges and intangible amortization. Travel and entertainment expenses were also up reflecting the increased size of the salesforce. On the fee income side, other noninterest income increased by $12 million over the first quarter last year. This increase was driven by a $15 million total increase in cardholder fees, commercial banking revenue and BOLI due to headcount additions.

Moving quickly through some of the business line detail. In commercial, we had a great quarter for commercial loan growth, with strong growth in loans and year-over-year growth in commercial banking revenue including both international and loan and lease fees. Deposit revenue is flat as George mentioned, due to the increase in rates and corresponding impact on compensating balances. The retail side of the shop, as we said earlier we are seeing decent performance on the deposit side with growth dominated by new Banking Center production. In addition, we continue to see consistently good performance on the lending side. Deposit revenue remains sluggish however, on flat overdraft fees on a year-over-year basis.

Briefly I would say we're not happy with that and we're looking closely at the trade-off between fee levels and attrition rates in a couple of affiliates on an experimental basis in order to determine if there are opportunities to drive better profitability on the retail side. At this point, it is too early to tell exactly what the results will be. Fifth Third Processing Solutions had a great quarter, with revenue up 13% year-over-year and 36% on a core basis. The financial institutions group within FTPS is up 23% year-over-year, reflecting the benefits from new customer revenues.

Merchant revenue was up modestly year-over-year, but up an exceptional 55% excluding the impact of sold contracts. This growth is representative of strong retail growth in both the overall economy, as well as for our customer base specifically in addition to the impact of new customer additions.

The mortgage side, mortgage banking improved significantly from last quarter with originations remaining good overall at just under $2 billion. This quarter's results included approximately 20 million in MSR positive valuation adjustments, offset by approximately 16 million in amortization expense, and 10 million in negative mark-to-market hedging results. The MSR valuation currently stands at approximately 158 basis points. On the IA side, revenues were up from last quarter but down modestly year-over-year on slower retail brokerage revenues, especially as George noted earlier, driven by fixed annuity sales.

That concludes our comments and at this point we would like to open it up to any questions you may have. Operator?

Betsy Graseck of Morgan Stanley.

Betsy, do you have a question?

John McDonald of Banc of America Securities.

Good morning. Mark, I was wondering if you could comment on how you are funding loan growth that exceeds the core deposit growth? Are using the time deposits which seem to be growing? Is it a combination of time deposits and wholesale borrowings? Can you give us a feel for that?

Absolutely. It is a combination of time deposits and wholesale borrowings that is funding the loan growth in excess of the deposit growth, at this point.

What kind of competition are you seeing on a time deposit and what kind of pricing do you get on that versus the wholesale borrowing?

The pricing on the core time deposit business, the non-jumbos, is significantly better than what we are seeing on the wholesale funding side at this point in time. We do see competition in a few select markets, but across the franchise it still remains an attractive option for raising funds.

Okay. Can you comment on some of the loan pricing competition you are seeing in the markets? And in terms of loan growth, are customers utilizing the lines more now? Are you still gaining share -- is most of your growth coming from gaining share?

It's actually, John, coming from both, increase in line utilization as well as new customer additions. Spread on the new commercial origination business is remaining relatively constant at this point in time, in that 275 basis point kind of range. So we feel pretty good about that.

Okay. Would you say that the utilization of the lines is improving or has that been relatively steady?

It has improved a little bit though it is not the primary driver of the growth.

Thanks.

Fred Cummings of KeyBanc Capital Markets.

Good morning. A couple of questions, one on the fee income line item. You mentioned that you had a gain on sale of student loans. Can you quantify that for us, Mark, and give us your outlook for future gains?

Let us take a quick check there.

Student loans sales, Fred -- this is Brad. Student loans were up about $5 million, it's volume driven. We typically see this type of activity in the fourth and early in the first quarter. I do expect a kind of similar number early this quarter, but that will wind down.

It will taper off, it's a seasonal.

Secondly, it looks like, at least on an average basis, securities portfolio contracted pretty sharply. Can you give us some sense for how you plan on managing the securities portfolio going forward?

Absolutely. We would love nothing more than to be able to continue to drive the strong loan growth and substitute loans for securities. A good example of that being, over the course of this quarter, we acquired with First National, about a $1 billion portfolio, just under $1 billion. The net retention from that portfolio is only about 300 or $400 million. We did reinvest it. It isn't the securities that we picked up, if you will, but we also let about half of $1 billion or so of that portfolio just bleed off.

One last question on the consumer loan side. Would you attribute, it looks like on the consumer side, you saw a slight slowdown first quarter versus the fourth. Would you attribute any of that to seasonality? Or is it your sense that the consumer, in response to higher interest rates, is less prone to say drawing down their home equity lines of credit. Do you have any sense for what is happening there?

Fred, I would say there is a little bit of seasonality in those numbers. At the end of the day we continue to see strong production numbers. Utilization rates on some of the new lines may not be quite as high coming out of the blocks as they have been in the years past or in months past. I would say the other factor there is obviously the indirect auto business which is reflected within the consumer category, as well, where competition from captives and the like has made that more challenging than in the past. However, I would tell you originations in that business over the last couple of months have picked up meaningfully and expect that tide to be stemmed here very shortly.

This is George. Our originations on the direct loan side are up really pretty significantly. The outstanding balances, the drawdowns, the funding of those are a little bit softer than we have seen in the last couple of quarters. But we are very encouraged by the originations. But again, I don't know whether that is due to oil prices or gas prices or people consolidating debt and paying other things off. But the originations are very strong. The balance sheet growth has not been quite as strong.

We know we can control the origination, so we are focusing there day-in/day-out, making sure we are getting the new customer acquisitions, Fred.

Okay. Thank you.

Kevin St. Pierre of Bernstein.

Good morning guys. I was wondering if you could characterize the competition for core deposits. The your press release and comments this morning seem to indicate that it's as much seasonal as it is anything. I was just wondering if you could characterize how much of the apparent weakness seems to be seasonal or is there competitive pricing for interest-bearing checking? Maybe if you could comment on that?

This is George. I think there is obviously some seasonality there. From the competitive landscape, again, it varies by whether it's checking account. Our net checking account openings, number of accounts opened has been very strong. They are up pretty significantly year-over-year. There is some pressure on the higher end, the hot money if you will, out there. It varies city-by-city. I think I always mention there is about 300 banks in Ohio, there is another 100-some thrifts and 570 credit unions. And depending almost by street corner, you can get tremendous varieties in the pricing.

With some of the bigger acquisitions that have occurred in our market, we have had four major acquisitions from the Charter Bank being acquired by Citizens, to Provident here being acquired by National City, to the Chase/Bank One deal, and then the region Union Planters thing. Actually I think the deposit pricing has gotten a bit more rationale. Mark, you might want to comment.

Kevin, I would say there is a high degree of seasonality there. If you look at the months of March in isolation we had extremely good deposit growth. In addition to that, I would say that in that month of March as well as George alluded to, we had almost a twofold increase in the net new account openings during the month of March over the similar month last year, and that would be new accounts added, less attriting accounts. So it is a net new account number.

I would say clearly, as we noted in our comments, some of the higher balance accounts we continue to see some attrition in those, if you will. But on a customer acquisition fronts and the ramp up of the funding associated with those new accounts, we feel like that will be reflected as the year moves on.

If I could just ask a separate question on the -- Mark, you mentioned in some of the affiliates looking at C (ph) levels versus retention. Could you be a little more specific as to what types of things you're looking at?

I would say specifically, Kevin, what we are looking at there is we think that the industry as a whole has probably hit the point of customer sensitivity to fee increases. We found the inflection point, shall we say. Without going into a whole lot of detail here for competitive reasons, I would say what we're looking at basically is a -- call it an overall realization play as opposed to an item-by-item or day-to-day realization play.

So your anticipation would be that, we probably from an industry perspective, we probably have peaked on an overdraft fees and deposit fees? But your comments seem to indicate that you're looking to address the decline in fees.

In terms of a per item charge, I think it is certainly true that we peaked as an industry, Kevin. I think what we're looking at is, at what price and at what frequency does it positively impact attrition rates on those, we will call it high churn account rates.

Right. Okay, thank you.

David George of A.G. Edwards.

Good morning. Just a couple questions. First, with respect to the accelerated stock buyback that you announced and it is part of your fourth quarter earnings release, is there any color you can provide us with respect to that? Is the counterparty that you have engaged completed that, or is there anything you can provide for us in that regard? And then I've just got a couple of quick follow-ups.

I would say the counterparty has not yet notified us that they have completed that transaction. In terms of exactly where they stand on it at this point in time, I will be honest with you and tell you I really don't know. We got the shares delivered the date we did the trade and I really haven't been following their day-to-day activity all that closely.

But from your perspective, there is stock to buy. Is that right?

They are still in the market, yes, absolutely.

Just a couple of quick follow-ups, if you don't mind. First on the expense growth, do you expect to see moderation in that core expense growth numbers, or any type of forward-looking commentary you can provide us in terms of expenses?

I would say absent continued investment in the franchise, which we continue to feel is very important in building long-term value, I think you can expect to see moderation in those expense growth numbers of a pretty significant nature. That being said, it is also fair to state that a big portion of those dollars today are being invested in the franchise. I would continue to expect to see sales headcount additions, as well as new branch buildouts.

Just one final follow-up. On the processing line, obviously that was a significant growth, even a little bit better relative to what you had mentioned on the mid quarter update. What is a sustainable growth rate number? What are you looking for for the full year in '05?

I have talked to the leaders in there and I think we feel pretty comfortable, David, for the near to intermediate-term that 20% is a good number. I don't see a lot of downside to that number and certainly this quarter we have got positive surprise upside to it. Depending upon, one, continuing to get new customers on the merchant and financial institutions side, and continuing our efforts to enhance the profitability on it going downstream a little bit on the merchant side. But 20% feels very good.

Okay, thanks.

Chris Mutascio of CSFB.

Good morning. George, just a quick question on the deposit side. You mentioned if deposit growth becomes somewhat disappointing you won't sacrifice short-term earnings to fund upward movements in deposit costs. What would be disappointing for the year in terms of growth for deposits for you all?

That would be tough to put -- there is so many dynamic factors out there. What I want to say is, it would be very easy for us to say, hey we are not going to open any more branches, we are not going to hire any more salespeople until there is a difference in the deposit growth there. But I think obviously, we would like to match or to fund our loan growth with our deposit growth. I think it is kind of the targets that we have set there. There is a lot of different dynamics involved in that. But I think just seeing what is going on, the consolidations in the market, the opportunity that we have, continued openings of branch offices and because now the acquisition pricings are still very high and we are getting good deposit -- good growth out of these new offices that we are opening. We feel very good about that and we don't want to slow that down. Plus, the salesforce, whether it's middle market lenders, whether it's private bankers, all types of salespeople have proved to be very profitable for us at the margin. So we do want to continue those.

If I could follow-up. Mark, when I read through the release, I looked at the reserve levels in terms of a dollar amount not moving despite the fact you acquired First National, and it goes in there talking about the mark-to-market adjustments, I guess, on their loanbook. Does that mean that the loanbook you acquired was not as good as you originally thought and, therefore, wiped away the reserves that you acquired from the company?

No. The loanbook we acquired was actually quite good. Being intellectually honest, they had a better loanbook that we did, to be honest in terms of the historical charge-off and NPA performance on it. But what happens in the purchase accounting translation is you actually mark those loans to market as part of the acquisition. So that has already taken place and is in the acquisition-related charges and won't be reflected in reserves going forward.

The provision balance that was on First National's balance sheet is actually a component of our mark-to-market adjustments, the carrying value of those loans assets, Chris.

Correct.

Thank you.

Ed Najarian of Merrill Lynch.

Good morning. Most of my questions have been answered, but just two quick ones. First of all, how should we think about the growth rate of deposit fee income from here? Obviously, you mentioned you were disappointed in the number. It looks like we are seeing a material slowdown in deposit fee growth throughout the industry. I am just wondering if you can give us your insight on how to think about it from a growth perspective from here? Secondarily, in terms of additional buybacks on the 20 million share additional authorization, can you give us any sense of what you think the pace of that is going to be? Thanks.

I will start with the 20 million share authorization that is out there. Obviously until the counterparty in the overnight completes their activities we won't be doing anything else out there on that $20 million -- or 20 million share authorization. I would say at this point in time we feel pretty comfortable with the capital levels we have got. We probably target maintaining something in this range, possibly a little bit higher. Depending on the capital accretion we get as we move through the year, you can probably back into the math there.

This is George. I think on the deposit service charge levels out there, probably flat would be the best description. There is going to be some points that are going to bring it up. The number of net new accounts, for example, is positive and that is going to bring it up. However the elasticity that Mark talked about, there is a point at which people won't pay certain overdraft charges or certain fees. And the industry is going much more to a totally free checking product out there with all of its attendant vagaries that are in that in terms of pricing and fees that are associated there.

I would say, as we look forward on the commercial side in particular, we have an ability we believe to sell through some of the earnings credit increases that are going to be taking place as we move forward. We specifically have a number of campaigns running currently targeting our CTM, our Cash and Treasury Management business, as well as several other referrals on that side -- referral campaigns on that side to drive growth on the commercial side through the impact of the earnings credit compression. So I would say George's comments probably accurately reflect what we stand today on the consumer side of the equation, but I think we probably have a little more opportunity on the commercial.

A good example there. We actually saw -- as far as commercial activity in general, we mentioned it was a strong quarter on the deposit side in terms of items and activity on the treasury management side. We saw about an 8 to 12% increase in activity which was entirely absorbed by earnings credit rate adjustments and resulting in flat commercial deposit revenues.

When you talk about flat, I would imagine you still expect a seasonal rebound which is typical in the second quarter relative to the first?

Generally.

But probably referring to a flat year-over-year kind of trend?

Correct.

Thank you.

John Balkind of Fox Pitt.

Good morning guys. Just two quick questions. Forgive me if I missed the first one. Could you talk a little bit about your other fee income line and the variances relative to fourth quarter? Two, on the interest rate environment, and who knows where it is going to go, but it looks like we have got another rally in the bond market and the curve is starting to flatten out against. Could you talk a little bit about your strategies that you will employ if we continue to flatten from here?

Our model continues to be on the flattening side, continues to be a very dynamic look. If we sit and look at where we are today on a yield curve basis, funds to ten year, I think we are about 35 or 36 basis points flatter than we were at the end of December, something like that. We are managing with an expectation of a continued very flat to -- let's put it this way -- even flatter curve than we are dealing with right now. And the numbers that I cited earlier pretty well reflect that being baked in at this point in time.

We have continued to increase the percentage of floaters that are in the portfolio today. It is about 18% float -- 18% variable at this point in time. That is obviously up meaningfully from where we have been, and we feel very good that we're positioned again very, very well to work through that. On the other fee income side of the equation, of particular strength we saw in this quarter, again would have been a $15 million increase in cardholder fees, commercial banking revenue also was stronger particularly reflecting international fees, and a few other categories. We did also have some strength and pickup in the BOLI line item due to some headcount additions.

The cardholder fees linked-quarter was a $2 million adjustment and it is only about $15 million overall.

Great, thanks.

Joe Stieven of Stifel, Nicolaus.

Good morning guys. Most of my questions have been answered, but George, let's go back to loan growth for a second. First of all, can you give us a little color on which ones of your markets are growing at the fastest rate, number one. Number two, on the overall loan growth, was that a little bit above your expectation? Three, just talk about pricing a little bit because it still appears to be very competitive. That is really it.

I think our newer markets, if you look at our consumer markets and the commercial markets, Chicago has really shown some really good growth. Our Western Michigan markets, Cleveland markets, have been growing. Our larger markets have really been growing pretty well there also. But we're getting good growth out of some traditional stuff, the Columbus and Indianapolis markets, where we don't have the dominant share. In the markets where we have got 30, 40% share, obviously we are not getting that kind of growth out there. But again, there has been pretty good growth across all of the markets out there. That holds true in the commercial side as well as in the direct lending out of our Banking Centers.

George, give us a little update just on the M&A front because obviously you just completed your deal in Florida. When you look at your franchise, are there holes that you really think need to do deals in or is it somewhat hopefully more just a fill-in type.

I think when you look up here in the Midwest at our markets up here, we don't see that there are any MSAs where we have to go out and purchase something, as you can tell, just due to the pricing. The price expectations are still very high on the sellers' parts and we think it makes much more sense just to go build offices here in the Midwest. As you know, we opened our first office over in Pittsburgh in December, and I think they are up to about 40 million in deposits out of our first office. Last Monday we opened our second office. We are planning a few offices in the St. Louis market there shortly. Our bank down in Nashville that we acquired, had nine offices. They now have 18. That bank was about 800 or 900 million when we acquired it. They are about 1.8 billion, 1.9 billion right now. So the growth down there has really been pretty good and that has just been all de-novo branch growth.

In Florida, we are just combining our bank with their bank. The merger was completed the second week in February down there, and that seems to be working pretty well down there. We have a number of de-novo sites that we're looking at down there, just due to the high growth potential down there. But there are some 50 or 60 potential sites that we're looking at down there where we can put new offices. So in terms of the acquisitions, we're spending much more time just on de-novo growth rather than on, hey we've got to be in X, Y, Z city here.

As far as acquisitions go, I will kind of add to that, at the end of the day we remain opportunists and capitalists. George is exactly right on where we're focused. If we do get some opportunities coming along here that we can make sense of from a pricing standpoint and a market expansion standpoint, we would probably look. That being said, the guidance I think we have for you out there is, I wouldn't expect a deal coming around the corner nor would I expect anything of significant or meaningful size as our next opportunity.

Final question, regarding loan growth. Was the loan growth above your expectations for the quarter, just on overall basis?

I think generally it was in line. If you got back and look at the last couple of years, we have got a very good core quality lending group here, both on the consumer side, what we get out of our Banking Centers -- we're pleased with that -- and what we are getting out of the commercial side. And we continue to add both branches and we continue to add middle market commercial lenders in all of our market out there. So it's pretty much in line with where we expect to be. We think we can always do better.

Thank you.

Denis LaPlante of Keefe, Bruyette & Woods.

Good morning. I guess there are a couple of things I would like to venture into. The rate sensitivity analysis guidance you gave is a little more pessimistic than you were about a quarter ago when you were suggesting that you would think margins would kind of improve. Despite the fact that you haven't changed your viewpoint on what is going on in terms of curve, what is causing that right now compared to fourth quarter?

I think there are two things, Denis. I think, number one, the forecasting process itself is inherently dynamic in terms of how we look at things and the assumptions that we make in that process. I would say, number two, we are obviously dealing with a higher and flatter curve in our base case scenario today than would have been our base case scenario if you looked back at 12/31. So at the end of the day, it is reflective of the fact that at 12/31 you had a curve that was 35 basis points steeper than it is today in your base case that you're modeling off of.

In terms of your deposit pricing, what are you assuming in terms of -- what is elasticity given a 100 basis point move in rates, how much are you baked in in terms of your modeling?

From a competitive perspective I probably don't want to share that exactly and let my competitors listen in on this call and pick this up. Let's just say it is not one-for-one beta by a long shot.

We still expect to be fairly competitive though, Denis. I see think what you have seen from us recently should continue.

The capital ratios came in around 665 million. You have indicated that you are looking to build that gradually over time. Have you put a ceiling on where you think that number is going to be?

Not an absolute ceiling at this point in time, Denis. I would say we feel again pretty comfortable in this general range of tangible common equity levels we have got. Being reflective of the M&A comment earlier, to some degree in a purchase accounting world, even a little bit of tangible common equity is still king. Realistically, what I would expect to see is, I would expect to see us build it up here over time. And then either use that as it exceeds levels that we as a management team sit down, kick around and discuss, either use it to return to shareholders in some form or fashion, probably repurchases, and/or put it to work expanding the franchise.

Would you expect that that number gets back above 7 to 7.5? Is that a reasonable range to use?

Yes, I think that is probably a reasonable range to use.

Lastly, I know you have a deposit campaign going on that I think ends at the end of April. Could you give us kind of a sense of where the affiliates stand relative to plan on the campaign?

I would say the deposit campaign is going exceptionally well, particularly in the month of March. Again we had a lot of seasonal weakness in January and February. The month of March exceeded our expectations, and a snapshot look through the first couple days of April and flash reporting would also look very, very good.

Okay, thank you.

Vivek Juneja of J.P. Morgan.

I want to clarify a couple things. The deposit campaign you just talked about, where are you seeing -- which categories are you seeing most of the growth in?

The most growth we have seen at this point in time would be in three categories. The two primary leaders would be the savings and money market accounts, followed by the demand deposit accounts.

Okay. Going back to deposit service charges, you talked about the fees being too high in the industry and that the consumer seasonality (ph) and that you are experimenting with that. In the first quarter, do you see impact of -- you are just reducing fees (indiscernible) just in a couple of markets, or have you actually started to reduce fees across the board? Can you just clarify that?

We did not reduce -- we did not change our fee structure at all in the first quarter. That was something we are looking at going forward in the second and third quarter. If we did it, we would try it in a market and test it and see how it worked and then spread it throughout.

We do have one market running an experiment right now, Vivek. I would say early returns on that are good, but it is just one market at this point I'm and it is early in the process. So I don't want to call it a success or failure there yet.

I don't know that we want to make a broad statement as determining that fees are too high either, Vivek. That is probably something we're not capable of being the master on. But it is certainly -- we are certainly going to look and see if we can reduce attrition, I think, is the thing to walk away from.

Okay, great. Thank you.

Gary Townsend of FBR.

Good morning gentlemen. How are you? Just a couple follow-ups, most questions are out there. Repurchase activity, as you go through 2005, if you're trying to build you capital levels, just assume that will be pretty modest?

Yes, I think that is probably a pretty safe bet.

You discussed too, just the success you are having in your new markets with your de-novo expansion. Just hoping that there might be a bit more color that you could provide. How are you measuring that? What would your principal criteria be, comp store growth? What are you developing to really track that?

We're developing both the same store and new store type mentality. It would be the same as any major retailer. In a previous presentation we had indicated that last year was dominated -- early in the year was dominated by new store growth. We saw a pickup in the second half of the year in same store growth. First quarter this year, we see a modest majority on new store growth. I think that is reflective of high balance attrition which we have all talked about a great deal. Obviously, the new stores have less exposure to that. I think that is the thing to walk away from.

The growth levels in new Banking Centers, Gary, is similar to levels that we have seen. Some of those numbers will be at one million dollars a month or something like that. Some branches are more successful than others. George mentioned one did $40 million. We have some that are more in the 15 to $20 million after a year. So they are across the board. Some work better than others. But I think still that de-novo branching continues to be our most cost-effective form of expansion in some of the markets where we don't have the size that we would like to see yet.

This is George. We are also spending a lot time on cross-selling initiatives. When somebody comes in and instead of just selling them the checking account, it is combining the brokerage accounts and the debit cards and the savings products. We are doing a lot more on that cross-selling side, in addition to cross-selling mortgage customers for other products and selling more credit cards to consumer loan customers. We are doing a whole lot on that side. And those cross-selling efforts in newer markets, the numbers work a lot better just because we have smaller shares out there.

When will you begin sharing some of these metrics with us? What is your plan there?

How about next investor presentation.

Super. Sounds good. Thanks very much for your time today, guys.

Jason Goldberg of Lehman Brothers.

Thanks. Good morning. Most of them have been addressed. It looks like the tax rate came in a bit lower this quarter. Just maybe you thoughts in terms of the outlook there. Is this kind of a new base rate or should we expect it to creep back up?

There probably is a new base rate that is slightly lower than what you are used to seeing, Jason, but it is not as low as what was printed in the first quarter. We had statute of limitations run on one issue and we also had a refund come back from one of the states in which we operate, on a claim that we have filed. So that artificially pushed the tax rate down a little bit low in the first quarter.

I think a new base case is certainly reflective of BOLI, but a little bit above would be the first quarter number.

That's helpful. Thanks.

Thank you very much for joining us this morning. We appreciate your time and attention and we will talk to you soon. Thank you.

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