Fifth Third Bancorp (FITBP) 2009 Q1 法說會逐字稿

Good morning. My name is [Takia], and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third first quarter earnings conference call. (Operator Instructions).

Thank you. Mr. Richardson, you may begin your conference.

Thanks, Takia. Hello, and thanks for joining us this morning. We will be talking with you today about our first quarter 2009 results. This call may contain certain forward-looking statements about Fifth Third Bankcorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified a number of those factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call. I'm joined here in the room by several people. Kevin Kabat, our Chairman and CEO; Chief Financial Officer, Ross Kari; Chief Risk Officer, Mary Tuuk; our Controller, Daniel Poston; our 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 will turn the call over to Kevin Kabat. Kevin?

Good morning, everyone, and thanks for joining us. There is a lot going on in the industry right now, and I would like to address the impact of some of those macro issues to Fifth Third. I'll also provide some highlights for the quarter before turning things over to Mary and Ross for a more detailed look at our financial performance. The major development in the quarter for Fifth Third Bancorp was our announcement that we plan to sell 51% of our processing business to Advent International. The transaction values the business at 2.35 billion before about 50 million in valuation adjustments. This transaction brings us a partner to co-invest in a business that we believe has significant additional growth opportunities. And Advent's substantial expertise in the payment space, particularly internationally, will be beneficial as well. Additionally, we expect the transaction to generate a pretax gain of approximately 1.7 billion, and net income of nearly $1 billion. Tier 1 and TCE ratios would increase by over 90 basis points, and tangible book value per share would increase about $2 per share to $10.80 on a pro forma basis.

Now in terms of the economic environment, for most of the past 18 months, it's been a pretty steady drum beat of negative news and developments, and things aren't going to change immediately. However, recently we've seen a few signs that maybe signaling that the rate of deterioration may be beginning to slow. The rate of new unemployment claims just dropped, housing inventories are beginning to come down in a few markets, and the housing affordability index has improved significantly over the past several months. Mortgage refinancings are high, increasing discretionary spending power. We saw an improvement in year-over-year processing revenue growth after several slowing quarters, and we expect that to continue; so consumers may be showing some signs of life. So while economic conditions are likely to remain challenging near-term, there are some reasons for modest optimism regarding the outlook relative to the past four or five quarters.

Now let's take a look at operating results for the quarter. We reported net income of 50 million compared with a net loss last quarter of 2.1 billion. Last quarter's results included a goodwill charge of 965 million, approximately 800 million of chargeoffs associated with the credit actions that we took, and a 700 million reserve build. Including preferred dividends, this quarter's net loss attributable to common shares was 26 million, or $0.04 per share. Results this quarter included a resolution of our leverage lease litigation; and we've also affectively put potential negatives related to the [Boley] issue behind us, as the residual market value exposure is now about $20 million. Coupled with our credit actions last quarter and our continued efforts to work out or restructure troubled loans, we have been working very aggressively to deal with problems and get them resolved. As you would expect from Fifth Third, we are aggressively managing our expenses in this environment.

During the quarter, our core expenses were reduced by 9%, as we remain focused on optimizing our resources. We also continue to reallocate personnel to areas such as mortgage modifications, our troubled debt restructuring group, and the commercial special assets group. We had continued strong momentum in deposits. Average core deposits were up 2.4 billion sequentially, or 4%, with average demand deposits up nearly 1 billion, or 6%. Our every day gray rate philosophy remains intact. We continue to offer competitive rates, but do not seek to be the market leader. DDA account production remained strong during the quarter, with net consumer accounts more than doubling from fourth quarter production. We also saw average account balances move higher this quarter, with average consumer deposit account balances increasing 2% sequentially and average commercial account balances increasing 1%. Consumers are leaving higher balances in DDAs, given the low rate environment. That's a welcome change for declining average balances, which most of us in the industry experienced in 2008.

Excluding First Charter purchase accounting accretion, which is running down, and the $6 million impact to NII from our LILO settlement, our net interest income declined 9% sequentially, in line with our expectations given the nature of our assets and liabilities. The decline was driven by repricing related to rate decreases occurring more quickly for assets than liabilities. Our liabilities will continue to reprice over the next several quarters, as higher cost CDs originated during the volatile third and fourth quarters mature. We'd anticipate 15 to 20 bps of core NIM expansion in the second quarter, and continued improvement throughout 2009. Reported NIM expansion will be about 5 bps lower than that. Corporate banking fees increased 8% on a year-over-year basis, although they declined sequentially due to seasonality. Lower activity levels due to economic weakness also led to reduced demand for certain products. Over the past several years, this line has grown in to a large and consistent source of fee income growing as a compound growth rate 18% since 2006. We continue to focus on deepening our relationships with our corporate customers and we've significantly improved our corporate product sweep.

Processing fees were down from a seasonally strong fourth quarter, but were up 5% on a year-over-year basis. Sequentially, transactions increased 5% in credit card and 12% in debit cards. But average ticket sizes in the processing industry are running lower than they have for several years, as consumers have shifted their spending habits from things like consumer electronics, branded products and value-added retailers to purchases of lower dollar value items and necessities. We had a record quarter in the mortgage business, originating 4.9 billion of residential mortgage loans. Mortgage banking net revenue was 150 million in the first quarter, including MSR hedges, compared with 67 million in the fourth quarter. Our application volume was 4 billion for March alone. And at the end of the quarter, our total mortgage application pipeline was around 7 billion. Note that most of these loans do not stay on our balance sheet. Net chargeoffs for the quarter were 490 million, a little better than our outlook in January.

Losses on loans in the portfolio declined 337 million sequentially, excluding losses related to our fourth quarter credit actions, which were about 800 million last quarter. We currently expect net charge offs in the second quarter to be a bit higher than the first, maybe another 100 million or so. Total MPAs, including held for sale, increased about 570 million during the quarter, which remains a high level, but reflects a moderation of growth. We currently expect MPAs to be up again in the second quarter, but continued lower growth than we saw this quarter. A moderation of MPA growth would reduce pressure on the need to continue to increase loan loss reserves at the pace we have seen the last several quarters. Our allowance coverage ratios remained strong, as we provided 283 million in excess of net chargeoffs for the quarter, boosting the allowance to loan ratio to 3.71%. The allowance to non-performing loan ratio was 128% at the end of the quarter.

Over the past year, we've increased our reserves by nearly 2 billion -- a billion in the last two quarters -- and we believe we are well there. Turning to capital, our regulatory capital ratios improved and remain very strong. Our tangible common ratio remained steady at 4.2% of tangible assets and 4.6% of risk weighted assets. These ratios will be strengthened further by the processing joint venture with Advent. Pro forma for the transaction -- the Tier 1 capital ratio would be about 11.8%, and the TCE ratio would be about 5.2% of tangible assets and about 5.5% of risk weighted assets. Now, those tangibles ratios don't include the benefit of unrealized securities gains, which would increase those ratios by about 12 bps. Our Tier 1 ratio will be 300 to 400 basis points above our 8 to 9% target upon the closing of the transaction, and would be 8.8% excluding the CPP preferred we issued in December. That's a position we feel good about as we look toward an eventual repayment of that investment. Let me spend a couple of minutes on some of the government programs announced during the quarter. First, as you know, we have all been asked not to discuss the progress of the stress tests, which are expected to be completed around the end of the month, so I won't discuss that here.

What I can tell you is that we expect to be as transparent with you as we are allowed to be with respect to the results of those evaluations. When that be or what that will look like, I can't say yet; but we'll share as much as we have the latitude to share. We think that vehicles such as the Public-Private Investment Program have potential to be beneficial to the financial markets, particularly to generate some price visibility on a number of assets. However, given the nature of our assets, I wouldn't expect this to be something that will have a lot of direct impact on Fifth Third. Additionally, the (inaudible) should prove helpful in efforts to restore securitization market liquidity. Finally, as you know, we began voluntarily modifying consumer loans in a significant way back in third quarter of 2007. Through the end of the first quarter, we restructured over a billion dollar of loans, and we'd expect to remain aggressive on that front for some time to come as the HAMP program develops.

We continue to actively and prudently provide credit to our customers, and we continue to see good opportunities as competitors have gone by the wayside and as banks are pretty much the only credit providers in town. During the quarter, we deployed the CPP proceeds received at the end of the year by extending credit totaling nearly 18 billion. We also invested about 3 billion in consumer loan backed securities. At the same time, we managed or expanded our capital ratios. So we are actively engaged in providing credit to our communities, while at the same time managing our capital and credit position appropriately in a difficult environment. Before I turn things over to Mary, let me just wrap up by saying that while conditions remain difficult, we are in the best position we've been in for some time. We've strengthened the balance sheet considerably, taken a significant amount of risk out of the portfolio last quarter, building reserves and credit coverage metrics; and capital will be strengthened further with the closing of the processing deal.

Our quarter earnings power remains strong, and which provides us with significant capacity to absorb losses. Currently, provisioning at high levels of chargeoffs are consuming most of those earnings. As the economy stabilizes and improves, we'd expect core earnings to strengthen and credit costs to decline significantly, both of which would have a meaningfully positive impact on bottom line results. With that, I will turn things over to Mary to talk about credit results. Mary?

Thanks, Kevin. As you will recall, during the fourth quarter, we sold or moved to held for sale a portfolio of loans representing 1.6 billion of original balance. These loans were carried at the time at 1.3 billion, and we wrote those loans down to 473 million last quarter. For purposes of my discussion, I'm going to focus on the loan portfolio itself; and then afterwards, I will discuss the held for sale portfolio as a separate portfolio. I'll start first with chargeoffs. Commercial net chargeoffs in the portfolio totaled 256 million, down 370 million from portfolio losses in the fourth quarter of 2008. C&I losses totaled 103 million. About half of those losses were chargeoffs on loans to auto dealers at 26 million, and to real estate related industries about 28 million. That is down significantly from the 383 million of C&I chargeoffs that we took during the fourth quarter. Commercial mortgage losses of 77 million were driven by the continued weakness in Florida and Michigan, which accounted for about two-thirds of the losses.

Commercial mortgage losses in Florida were particularly high, with a net charge off ratio of 7.1% for the quarter compared with 2.5% in Michigan and 1.4% for the remainder of the footprint. Commercial construction net chargeoffs were 76 million, once again driven by Michigan and Florida, which on a combined basis accounted for approximately 42% of construction losses. Florida, again, is the most challenging market here, with loss rates running nearly double the rest of the footprint. A couple of general comments on commercial chargeoffs. The growth in commercial real estate losses has moderated outside of Florida, and that is an important development. At the same time, C&I losses are reflecting the broader effects of the economy on a portfolio that generally held up fairly well, Although loss severities in that portfolio -- 142 basis points this quarter -- are nowhere near what we've seen in, say, commercial construction.

Geographically, as I've mentioned, Florida remain a difficult market from a credit perspective, and that will likely continue until real estate prices bottom out there. On the other hand, Michigan had been our most challenging market, but trends there appear to be stabilizing somewhat. A large factor there is our actions to deal with a home builder book. Company-wide, losses on home builder loans declined 50% in the quarter falling, to 64 million. We currently expect home builder losses to be fairly consistent with that level in the near-term. Our remaining balances to Eastern Michigan builders and developers totaled 263 million at the end of the first first, of which 60 million were on non-accrual status compared with 57 million in the fourth quarter. Those non-accruals are carried at $0.39 on the dollar. As you will recall, we suspended new originations to homebuilders in late 2007, and remaining balances there totaled 2.3 billion. We also suspended new originations for non-owner occupied commercial real estate in early 2008. Most of our writedowns and (inaudible) actions in the fourth quarter were the most troubled loans in those portfolios in Michigan and in Florida.

Net chargeoffs in the consumer portfolio were 234 million in the first quarter, a $33 million sequential increase. As with the commercial book, we see continued pressure from Michigan and Florida, which constituted 50% of consumer losses for the quarter, and approximately 30% of total consumer loans. To give some more detail by product, net chargeoffs on the residential mortgage portfolio rose 7 million from the fourth quarter to 75 million. Michigan and Florida were again disproportionately represented, accounting for 79% of losses on a approximately 44% of the portfolio. We'd expect mortgage losses to rise in the second quarter, reflecting the migration to chargeoff of the higher levels of delinquencies that we saw in the fall of last year. Delinquency growth has stabilized somewhat, so we'd expect trends thereafter to moderate based on roll rates. Home equity losses rose 18 million sequentially to 72 million, including 30 million of losses on brokered home equity loans.

As you know, we exited the brokered home equity business in 2007. The net chargeoff rate on brokered home equity was 5.5% annualized, which is more than three times the level of loss experienced on our branch originated books. That brokered portfolio is down to 2.2 billion, and continues to run off. Auto loan net chargeoffs were up 3 million sequentially, and credit card losses were up 6 million compared with the fourth quarter. Credit card losses have tended to be highly correlated with the unemployment rate, so we would anticipate some further deterioration before things improve. I would note that this is a pretty small portfolio, and it is a branch-originated relationship product for us. Now, moving on to MPAs. Before I get started, I wanted to note that during the first quarter, we reclassified certain restructured loans based on regulatory guidance and restated prior periods to reflect this change . Under this guidance, we are classifying certain consumer restructured loans as accruing that are currently paying in accordance with their modified terms.

MPAs, including held for sale, totaled 3.1 billion at quarter end. Excluding 403 million of MPAs related to our held for sale activities, where the loans have already been fully marked, MPAs totaled 2.6 billion or 319 basis points of total loans. Excluding the 403 million of MPAs held for sale, our non-performing loan ratio was 289 basis points. Commercial MPA inflows were concentrated in commercial real estate related categories. Commercial mortgage MPAs increased 216 million, with Michigan and Florida accounting for 89 million of the increase. Again, there was a significant GAAP between owner occupied and non-owner occupied MPA ratios, which were 4.2 percent and 7%, respectively. Commercial construction MPAs were up 197 million, with Florida accounting for 133 million, or 67% of the increase.

Non-owner occupied projects are the most distressed in this category. C&I MPAs were up 127 million from the fourth quarter, driven by the construction and real estate industries. Across the portfolios, residential builder and developer MPAs of 554 million were up 188 million sequentially. This book represented 27% of total commercial MPAs. Moving on to consumer trends, consumer MPAs totaled 630 million at the end of the quarter, an increase of 97 million from the fourth quarter. Virtually all of that increase came in the TDR bucket and related to redefaults on previously restructured loans. We've modified about 1.1 billion since the third quarter of 2007, of which 167 million are carried in MPAs at March 31st. About a third of the loans that we've restructured to date have redefaulted, which I think is generally in line with industry experience. Residential mortgage MPAs increased 78 million to 475 million, with the increase largely TDRs, reflecting continued pressure in MIchigan and Florida.

Non-accrual rates continue to be two to three times higher for lot loans and non-owner occupied units compared to owner occupied traditional mortgages. Those loans represent about 15% of our mortgage portfolio and 40% of our mortgage MPAs. Home equity MPAs were 83 million at the end of the first quarter, a 4 million increase from the fourth quarter; again, largely TDRs. We've aggressively marked our MPAs through the process of taking chargeoffs, purchase accounting marks and specific reserves recorded through the first quarter. Portfolio MPAs, excluding held for sale, are being carried at approximately 63% of their original face value. Let me spend a minute now on the held for sale portfolio. As I mentioned earlier, we sold or transferred 1.6 billion of loans carried at 1.3 billion. We marked those down to 473 million in the fourth quarter, with all of that on MPA status carried at an average of $0.35 on the dollar. At the end of the first quarter, that portfolio was down to 403 million.

That 70 million decline reflected the sale of 48 million of loans and a gain of approximately 13 million, as well as the receipt of 18 million of principal payments and the repossession of 5 million in real estate. The remaining 403 million carrying value is held at $0.30 on the dollar, so a good start to the process in a validation of our marks last quarter. Turning to the allowance, provision expense for the quarter was 773 million, and was 158% of net chargeoffs, resulting in an increase in the reserve to loan ratio from 3.31% to 3.71%, or 3.1 billion, an increase of 283 million. The allowance to non-performing loan ratio remains at a very strong 128% at the end of the first quarter. As Kevin noted, we'd expect MPAs to grow in the second quarter, but moderation in growth to continue, which may permit lower reserve builds than we've seen in the last several quarters. We continue to provide detailed stratification of our loan portfolios and other trending data, which we filed along with the release. With that, I will turn it over to Ross.

Thanks, Mary. Let me start with a summary of earnings per share and some of the unusual items in the quarter. As Kevin mentioned, we reported net income of 50 million. After payment of preferred dividends the net loss to common shares was 26 million, or $0.04 per share. Quarterly results were impacted by several unusual items. Those items were about $0.18 of benefit in total, and are outlined in the release. During the quarter, we took steps towards surrendering the [Boley] policy that we've talked about a good deal in the past. That led to the recognition of a $106 million tax benefit from previously recognized tax deductible losses related to the policy. We also incurred a $54 million charge this quarter related to this policy, 43 million of which was related to the establishment of a reserve related to the surrender. Additionally, results include a $55 million tax benefit related to our leverage lease settlement to the IRS. As Mary just mentioned, net chargeoffs were substantially lower in the first quarter and were similar to the third quarter levels.

I would also note that our provision for loan and lease losses exceeded net chargeoffs by 283 million for the quarter, or approximately $0.32 per share on an after-tax basis. We don't continually expect growth in the allowance to continue to be as high as it has been in recent quarters; and therefore, the impact on earnings should begin to subside in coming quarters. Now let me walk through our results in greater detail, starting with the balance sheet. Average earning assets were up 1% during the quarter, driven by growth in investment securities and loans held for sale. As Kevin mentioned, we invested 2.9 billion in auto backed and mortgage backed securities, and loans held for sale increased 1.2 billion, reflecting growth in the mortgage warehouse. Average loans held for investment in the first quarter were down 3% sequentially, and that's 3% on a year-over-year basis. So while we've seen strong mortgage loan demand the the past several months, most of that flows through our warehouse and off the balance sheet.

Commercial demand remains very weak throughout the industry, as customers are being cautious about starting new projects in the current environment and are carefully managing their working capital. Average commercial loans decreased 6% sequentially and increased 7% from a year ago. Half of the sequential decline was driven by our credit actions and commercial chargeoffs of 1.4 billion in the fourth quarter. Commercial line utilization also dropped 700 million, reflecting customer management of working capital positions. Additionally, as you will recall, about 1.7 billion of our commercial loan portfolio in the fourth quarter related to the liquidity environment and off balance sheet programs. During the quarter, that total dropped about 300 million as draws on BRDN LCs came down. Most of the remaining 1.5 billion were loans brought on balance sheet in the fourth quarter from our CP conduit. The market for placing CP continues to ebb and flow in terms of liquidity, although it has improved recently.

So in general, there was no real change in commercial loan activity during the quarter, other than lower line usage. The demand remains relatively weak. Average consumer were loans up 1% sequentially and down 2% on a year-over-year basis. Average mortgage loans held for sale were up about 700 million, to 1.7 billion. Given our current pipeline, we'd anticipate held for sale balances to increase in the second quarter, a function of processing time on flow and portfolio sales. Now within consumer loans, auto loans were up 3% sequentially and down 6% compared with a year ago, due to the affect of loan sales and securitizations at the end of the first quarter last year. Credit card balances were up 4% sequentially and up 10% on a year-over-year basis. Balance growth has slowed as consumer spending weakened over the course of the year.

Residential mortgages in the portfolio were down 2% sequentially and 12% from a year ago. We wouldn't expect the portfolio to grow, given that we were largely originating conforming mortgages with the intent to sell 95% of our production. Flow sales during the quarter were 4.1 billion, and we sold 153 million of balances through portfolio sales. Home equity loans were up 1% sequentially, and up 8% from a year ago. Growth in this product has noticeably slowed due to falling housing prices and more conservative consumers. New production reflects branch-originated high quality loans with a max CLTV of 70% in more distressed markets. We expect continued loan growth to remain subdued in the near-term, given customer caution and our sales in most of the new residential mortgage production, which does not show up in the loan balances.

Moving on to deposits, average core deposits were up a strong 4% sequentially and on a year-over-year basis. We had extremely strong growth in DDA balances, which were up 6% sequentially and 18% on a year-over-year basis -- or 15% excluding acquisitions. Retail core deposits were up 3% sequentially, and up 7% year-over-year. We are seeing a bit of a barbell affect with consumers, as depositors show a preference for holding money in highly liquid transaction accounts or higher yielding CDs, resulting in flows out of savings and money market accounts. Average retail account balances were up about 2%, and average retail DDA balances were up 6%. Total commercial core deposits were up 5% sequentially, and commercial DDA balances increased 13% sequentially and 30% year-over-year, while commercial interest checking increased 8% sequentially and 9% year-over-year.

During the quarter, we saw a continued movement to commercial demand accounts in order to take advantage of the FDIC guarantee and a lower economic benefit from sweeping balances into interest bearing vehicles. On a sequential basis, average balances were up 7% in commercial transaction accounts, while commercial savings and money market balances were down 13%. Generally speaking, pricing is far more rational today than it was during the fall, and we would expect our deposit book to continue to price down over time as some of our higher rate CDs roll out. Moving on now to net interest income, taxable equivalent net interest income of 781 million was down 116 million sequentially. The decline was partially driven by lower loan discount accretion related to our acquisition of First Charter. This quarter's NII included 43 million of loan discount accretion compared with 81 million last quarter. We also had a charge of 6 million related to the change in timing of expected cash flows on leveraged leases related to the IRS settlement. Excluding these items, NII declined by 72 million or 9% from the fourth quarter.

This reflected a full quarter affect of fed rate cuts in the first quarter on asset yields, as loans have repriced faster to reflect market rates. Over the next couple of quarters, our deposit book will reprice and catch up, as CDs we issued last fall mature and we're able to roll them over in a more rational pricing environment. Net interest margin for the quarter was 3.06%, down from 3.46% in the fourth quarter. Loan discount accretion from First Charter accounted for half of the decline, and the charge related to leveraged leases reduced net interest margin by another 2 basis points. The core net interest margin declined 23 basis points on a sequential basis, in line with our expectations, and bottomed out in January, reflecting asset and liability repricing (inaudible). We'd anticipate the net interest margin to increase future quarters, as our liabilities continue to reprice in a much improved pricing environment.

We expect the core net interest margin to expand about 15 to 20 basis points in the second quarter, and the reported net interest margin to be up about 10 to 15 basis points. Moving on to non-interest income, reported non-interest income of 697 million was up 55 million sequentially and down 167 million from a year ago, which included the large Visa IPO gain. Excluding a number of unusual items I will outline in a second, non-interest income increased about 8% on a sequential and year-over-year basis. This quarter's results included the [Boley] related charges of 54 million I mentioned earlier, as well as 24 million of securities losses. Of that, 18 million related to our reclassification of certain securities from available for sale to trading that we use to fund deferred compensation plans. This move will allow us to better manage revenue and expenses related to deferred comp going forward.

Fourth quarter results included 34 million -- the 34 million [Boley] charge and 40 million of OTTI charges on preferred securities. Results a year ago included a $273 million gain from Visa's IPO, partially offset by 152 million [Boley] charge. We also realized securities gains of 27 million last year. Payment processing revenue was down 3% sequentially and up 5% on a year-over-year basis. The quarterly decline was largely due to seasonality, given the traditional strength of our fourth quarter transaction volumes. Generally speaking, we continue to see growth in transactions offset by lower average ticket prices related to lower consumer spending levels. New customer acquisition remains a focus and a strength; and we continue the process of building out merchant sales force. Corporate banking revenue was down 4% sequentially and up 8% year-over-year. Those fees are typically strongest in the fourth quarter, given seasonal loan renewal volumes. As currency markets have demonstrated lower volatility, we've seen less hedging activity among customers, and weaker commercial demand is also having an effect on swap activity.

Deposit service charges were down 10% sequentially and 1% year-over-year. Sequentially, consumer service charges declined 14%, reflecting fourth quarter seasonality and higher consumer balances. Commercial service charges declined 5%, driven by higher commercial compensating DDA balances, which produces lower account service fee revenue. Investment advisory revenue decreased 3% sequentially and 18% from a year ago, reflecting lower market valuations on assets under management. While the recent market rally should be helpful in this area, during the quarter the general trend was for assets to flow into lower yielding vehicles such as money market funds. As I mentioned earlier, we had an extremely strong quarter in mortgage banking. Net mortgage revenue was up 163 million from last quarter. The other line item related to this business -- securities gains on non-qualifying hedges -- fell 80 million sequentially to 16 million. If you net these items against one another, which is the better way to look at it, total revenue for mortgage banking rose 83 million from the prior quarter. Demand remains strong, with March application volume of 4 billion. We're also seeing significant interest in mortgages offered under the Homeowner's Affordability and Stability Plan, which accounted for approximately 1 billion of our March application volume.

At this point, this program is in its early stages and, we'll offer additional color on the impact of the program as it progress. Non-interest income this quarter was about 775 million, excluding the unusual items I outlined, and we currently expect a similar level of second quarter non-interest income. We'd expect seasonal improvement in processing and deposit revenue, which will be seasonally stronger, offset by mortgage revenue moderating to a more sustainable level. Moving on to expenses, excluding last quarter's goodwill impairment, which was 965 million, and other unusual items, non-interest expense decreased 9% or 95 million sequentially, an increase of 247 million compared with a year ago. First quarter results last year included the benefit of reversing 152 million in Visa litigation reserves. Sequentially, the fourth quarter included very high credit related costs, particularly reserves for derivative counterparty losses and higher provision for unfunded commitments. The decline in those two areas represented about two-thirds of the decrease. The remaining increase from a year ago represents the year-over-year affect of First Charter and higher credit-related costs, primarily loan and lease collection costs, and provision for unfunded commitments. We'd expect second quarter core and non-interest expense to be relatively consistent with first quarter levels, as we continue to manage costs aggressively.

Now moving on to capital, as Kevin mentioned, capital ratios generally strengthened during the quarter, and we expect them to improve further in the second quarter. The Tier 1 ratio increased 34 basis points to 10.9%, and total capital increased to 15.1%, both well above our target levels. The tangible common equity ratio held steady at 4.23%, which excluded about 12 basis points of unrealized securities gains. We know that different investors focus on different versions of this ratio, so we've expanded our disclosure in the release to try to provide transparency on this for you. I think we've provided four different methods. As you'll see, as an example, our TCE to risk weighted assets, including the unrealized gains, was 4.8%. Now as Kevin mentioned, our processing transaction is expected to add in excess of 90 basis points to all of our capital ratios and put us in a pretty strong position at the end of the second quarter.

On that note, I'll turn the call back over to Kevin for his closing remarks. Kevin?

Thanks, Ross. We appreciate your time this morning. I know you have a busy morning ahead. The environment remains challenging; but the actions we have taken over the past year will help provide us with the flexibility to make our way through the economic crisis and emerge a stronger Company on the other side. Our employees continue to focus on day-to-day execution, despite the significant distractions they are faced with on a day-to-day basis, and I think that shows through on our core results. With that, Operator, it's time to turn it over for questions.

(Operator Instructions). Your first question comes from Betsy Graseck.

Good morning, Betsy.

Couple of questions. One, could you talk through a little bit about the new loan growth that you are generating and the degree to which it is sourced from existing customers -- existing lines of credit versus new customers versus maybe existing customers and completely new lines of credit? What I'm trying to get a sense of is the degree to which your new lending is based on old pricing or based on new pricing.

A couple of things I would say in general, Betsy, on that. One is, we are seeing both. We are bringing in new customers, as well as renewing and extending lines with our current relationships, particularly strong relationships. I would tell you, generally, we are seeing and getting higher pricing, even through the renewal process as well; as well as, our focus has been on broadening relationships, particularly in the commercial book. So beyond pricing, we are also getting the ancillary services, treasury management services, more deposit relationships, et cetera. I can't give you a specific breakout in terms of dollar for dollar, new prospects versus renewals and originations in that way, but we are seeing both in that regard.

And the degree which the pricing ability that you have is increasing or decreasing as you kind of think through the last six months, and there has been a change in the competitive dynamic in your footprint. So it would be helpful to understand the degree to which you can either take advantage of that or not.

Yes. I think that's exactly a very good point, and we have been able to take advantage of that. And I think that's shown really on both sides of the balance sheet for us -- both our pricing from a yield on assets and customers that way, but also our expectations and what we've seen in pricing, even on the deposit and liability side. So you're exactly right. That's beginning to happen in both sides. We have seen that specifically.

I will just reinforce that the projected increases in net interest margin for the second quarter and continued throughout the year, as Kevin said, do reflect a better pricing environment for both deposits and loans, and we are very focused on making sure we realize that.

And that 15 to 20 bp increase was by year end, is that right?

No, no, no. That's --

That was each quarter?

That's the second quarter. And we should continue to see some improvement beyond that.

Okay. And then separate question on thinking through stress test. I know you can say much about it. The Journal had suggestions as to what the stress requirements were, in the Journal yesterday. Could you just comment as to whether those are numbers that you would feel confident with?

Betsy, you are getting your information the same place we are, then -- from the publications. But we can't comment on that. We don't know what the expectations would be, as you know, from that standpoint. We feel very good about our strength in capital ratios and positions today. And that's about the extent of what I can comment on right now, so.

Okay. And then just lastly, there are programs to help institutions move distressed assets off their balance sheets through the PPIP and the bad asset [TELF]. How do you think about those programs and the degree to which you would be interested or not?

Go on.

Yes. Clearly, the PPIP is something we are interested in, especially with respect to the assets that we have marked as held for sale. We feel like we have taken aggressive marks. We feel like the activity in the first quarter actually confirms that, and the PPIP should hopefully bring more buyers into the market and hopefully support a little improvement in the prices on those. So we're clearly looking at possibly using PPIP for those assets, as well as some other distressed assets, so.

Would you be willing to use PPIP even if it generated a loss for a portfolio, or only if it showed a rate at a gain or flat?

Well, we'd have to look at it on an asset by asset basis. But clearly, we feel that we have a large portfolio of loans that we've marked aggressively that wouldn't generate a loss and may generate a gain. There are other assets where we would have to look at what pricing ended up being through PPIP. But we're sure interested identifying that.

The other thing Betsy, just as a reminder, our fourth quarter actions -- we attacked aggressively our worst performing pieces of those portfolios. So we have taken a lot of actions that we think have well-positioned us for where we are today. But again, I think we went after the worst performing of our bucket in our portfolio, so.

Well, I would also reinforce from Mary's comments that for the MPAs that we are still holding as held for investment -- those on average are marked down to $0.63 on the dollar. It's -- even when we manage through normal MPA process, we have been aggressive in taking charges on those, and therefore it's worth consideration on whether of those assets could be sold, even without an additional loss.

And the other thing I would add to the overall comments is that we also have a lot of other vehicles before us for purposes of additional flexibility, so we have been able to take advantage of local market opportunities for sales of smaller pools of assets as well as some other larger pool opportunities, to Ross' point that we started on, already in the fourth quarter, and we saw some continuation of that in the first quarter.

Okay. Thanks, that's very helpful.

Okay, Betsy. Thank you.

Your next question comes from Brian Foran.

Good morning. How are you guys?

Morning, how are you?

Can I ask -- the Advent transaction, when I read the put language within the Advent transaction, it seemed to imply that with the limitations around selling all of Fifth Third and the limitations around the government ownership being above 20% -- or I shouldn't say limitations. With those things triggering the put option, it seemed like the message we should take away is you are fairly confident that between pre-provision earnings, your existing capital stack and maybe some other things like your asset management business, that you're very confident you can generate any capital you need to cycle from organic measures. So one, is that the right conclusion to take away from that put option language? And then two, is there any relative preference between -- are you thinking about more business disposition still, or was STPS it? Are you still thinking about potentially converting the convertible preferred, or is that off the table with the Advent transaction? Just different things you are thinking about in terms of the capital outlook from here?

I will just say that with respect to the Advent transaction, I think the conclusion should be that we are confident in our current capital position, we are confident in your ability to maintain an appropriate capital position, and leave it at that. So with respect to other capital generation ideas, last quarter, I think we mentioned a couple of other alternatives that are out there. They are still out there. We still recognize those. I think that we feel very good about where we are in, especially after the Advent transaction closes.

And then a follow-up. You are the second or third bank to specifically mention net interest margins bottoming in January. Can you give us a little bit more color, maybe where the exit run rate for the quarter is relative to January? And also why -- I understand the general idea of why the first quarter could be a bottom, but is January just the inflection point where rates have been at 0% for a while and new loan pricing starts to comes in? Or was it something about deposit pricing that happened and inflected in January? Why is January the inflection point?

Well, I think if you think about the way deposits reprice and what the environment was like in the third and fourth quarter last year, I think that the rate environment was very, very competitive and there was a real race to build liquidity. As a result, a lot of CDs went on the balance sheet at pretty narrow spreads -- high rates. In the third and fourth quarter last year, as that competitive rate environment eases pretty dramatically, the -- we ended up with all of a sudden number of those CDs that are rolling over in the first quarter, and the second quarter end up pricing down at a reasonably substantial rate. So I think the January was the influxion point; plus with bringing in TARP funds and the benefit to that -- from that -- at the end of the year, that also has a little impact. But if you think about how the trend would move and what it would look like at the end of if quarter I would just say simply that with January as a low point, the major impact is going to be as assets are renewing throughout the end of if first quarter and early second quarter, and then deposits are rolling over -- it's a heavy rollover quarter in the second quarter on deposits. You are going to see a fairly continuous lift in net interest margin from January through the end of the second quarter, so. Thank you.

Your next question comes from Mike Mayo.

Good morning, Mike.

Hi, with (Inaudible). Jeff, you said you thought the reserve building might be a little bit less next quarter, and I was just interested in why that would be the case. Do you think the pace of increase in MPAs might be less? I just look at the reserve to MPA ratio, which went down linked quarter, and just wonder what gives you a little extra confidence? And also, a few banks are talking about seasonality in terms of credit, in that the seasonality might hurt some credit trends the next quarter. If you could comment on that, too.

You know, I will just say as we look out to the second quarter, and then we always feel pretty good visibility into the next three months, we think the build in MPAs is slowing; the flow of new MPAs is slowing, and that would be the major driver for future trends in chargeoffs, and hence that's why we feel confident making that comment.

Couple of other comments that I would add to that. As you know, we took some very significant credit actions in the fourth quarter to really take the most significant loss risk out of the portfolio. So to that end, we think that we have been very aggressive, in particular with respect to the home builder portfolio; and we saw, obviously, much better trends in our home builder performance for that portfolio in the first quarter. We also think that the geographies that we've had the largest concentrations with respect to real estate being -- particularly the eastern Michigan geography as well as the Florida geography, saw the economic stress earlier, and so we feel better about how we are positioned relative to the timing of some of those economic deterioration trends that we saw in the geographies, coupled with the aggressive nature of the fourth quarter credit actions that we also took.

This is Jeff. The one last thing I think I would just note is that our reserve levels are very strong in the sense that reserves are there to cut to absorb losses, and our reserves are about 150% of our first quarter annualized chargeoffs. Not many of our peers would have reserves that are that much -- or that strong relative to their chargeoff levels.

And then just one short follow-up. MPAs went up by one-third, even with the big fourth quarter clean up. Just -- I know you covered some of this. But a short reason why that was the case?

The overall non-accrual trends that we saw in the consumer book were actually very, very good. The growth was actually almost flat exclusive of the loan modification activity that we saw. And in terms of the areas where we saw a little bit more weakness in the portfolio, as you would expect, there is still kind of two primary reasons for the weakness. One would be some of the additional deterioration in the real estate performance that we've seen; and then in addition, we are also focused at looking at some of the other industries that would have more of a correlation to the general economic trends, and we saw some of the trends there in terms of the projected non-accrual growth.

You had mentioned industries with consumer spending in commercial. What did you mean by that? Which industries?

Any industries that would have a more direct correlation to the deterioration in economic trends that would affect the customers' discretionary spend. So to that example, one of the things we would look at, as an example, would be the accommodation and food industry. To the extent that there is a much more direct correlation to the customers' discretionary spend, we are seeing a little bit more weakness in that kind of an example.

I'm sorry -- accommodations? You mean like food and hotel or --

Yes. Restaurants. Hotels.

Okay. All right, thank you.

Thanks, Mike.

There are no further questions at this time. Are there any closing remarks?

I'd just like to thank everybody for their time this morning, and have a great day.

This concludes today's conference. You may now disconnect