Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp Second Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Jeff Richardson. Sir, you may begin.

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

Thanks, Jeff. Good morning, everyone, and thanks for joining us. Today, we reported second quarter 2011 net income to common shareholders of $328 million or $0.35 per share. That's up 120% from last year's EPS, and up 30% from last quarter, excluding the $0.17 write-off of TARP discount. Trends continue to reflect broader aspects of the economy as it recovers, with positives including strong fee income results, controlled expense performance and improved credit trends. These trends generally offset the impact of a difficult interest rate environment and a competitive landscape, which negatively affected alternatives for securities reinvestment as well as lending margins. Loan demand continues to be lower than we'd like, as deleveraging trends and economic uncertainty continue to weigh on customer demand for new financing. However, taken as a whole, this is an environment that we've been able to take advantage of. We continue to build our relationships, both in terms of retail households and commercial lead bank positioning, and we continue to be recognized for our customer experience. Whether from our own customer surveys or those of third parties. So we continue to have success in deepening our own customer relationships and in building market share. That will drive value in the future and gives us confidence we can build upon current results. Dan and Mary will provide more details in their remarks, but in terms of financial results, I'll touch on a few high levels items here. Average portfolio loans increased $300 million sequentially, with C&I loans up about $600 million or 2%. Generally, paydowns remained high and that continued to impact loan growth. CRE loans were down about $400 million although that runoff continues to slow. Consumer loans were up about $150 million with growth in the residential mortgage and auto portfolios offset by home equity…

Thanks, Kevin. Starting with Slide 4 of the presentation, in the second quarter we reported net income of $337 million and recorded preferred dividends of $9 million. Net income to common was $328 million and earnings per share were $0.35. That compared with net income to common in the first quarter of $88 million or $0.10 per share. Prior quarter results were reduced by $153 million or $0.17 per share, they're related to the accelerated write-off of the TARP discount. If you exclude that, net income to common increased 36% sequentially, and EPS increased 30%. As Kevin mentioned, our return on assets was 1.22%, which is beginning to approach the lower end of our normalized ROA expectations. Return on equity was 11% and return on tangible common equity was 14%. Those are relatively strong returns for this point in the recovery, but we believe that they have room to improve further. As we've discussed previously, we believe our return on asset should normalize in the 1.3% to 1.5% range, with continued improvements in credit costs and a more favorable interest rate environment in the longer term. Those would also drive improvement in our return on equity measures. Additionally, our current common equity levels exceed our targets by about 100 basis points. We're obviously awaiting clarity on final capital standards for U.S. banks, but still believe that a Tier 1 common ratio target in the 8% range should be an appropriate level in a normal operating environment, for a bank of our size and business model. That said, we don't have any information on that front, other than what you've seen come from the Basel committee, as well as from some public comments from the Fed that any incremental capital requirements would likely be modest for banks at the lower end…

Thanks, Dan. Credit quality trends remain positive with NPAs, delinquencies and charge-offs all declining further during the quarter. While results can move around from quarter-to-quarter, we generally expect all key credit metrics to continue to improve during the second half. Starting with charge-offs on Slide 11. Total net charge-offs of $304 million decreased $63 million or 17% from the first quarter. That's 156 basis points of loan, down from 192 basis points in the first quarter and the lowest we have reported since the first quarter of 2008. Although they remain challenged, the biggest improvement came from Florida, where charge-offs were down 17% sequentially and from Michigan, down 32%. Included within that charge-off were $34 million in net losses recorded on a relationship that we've discussed the past couple of quarters. This was a foreclosed commercial credit collateralized with a number of individual consumer loans. It is carried in the other consumer loans line item. In the first quarter, you'll recall that we booked to $23 million in charge-offs on that credit. We have no remaining loss exposure on this credit and we continue to work towards recovering previously charged-off amounts. Excluding that credit in both quarters, net charge-offs declined $74 million to $270 million or 139 basis points of loan. Commercial net charge-offs were $141 million in the second quarter compared with commercial net charge-offs of $164 million in the first quarter. This marks the lowest level since 2007 and we saw improvement in all major portfolios. C&I charge-offs were $76 million, down $7 million from the prior quarter. Commercial mortgage charge-offs were $47 million for the quarter, down $7 million sequentially. Commercial construction charge-offs were $20 million, down $6 million sequentially. We've significantly reduced our exposure to the home builder portfolio and balances are down to $597 million…

[Operator Instructions] Your first question comes from Brian Foran.

I guess on the normalized ROA guidance, what I was trying to do is take the current credit-adjusted PPNR of $646 million. I guess, I have to add in the normalization of Vantiv earnings you referenced, which those 2 things get you to like a 2.4% pre pre-ROA and then backing in to the provision rate, that would produce a 1.4% ROA, it's like around 44 basis points. Is that -- breaking down the ROA, is that kind of consistent how you're thinking about it or is the normal provision higher but there's opportunities to also expand pre pre-ROA maybe with the TruPS redemptions and stuff like that. Just any thought process on breaking into the 2 would be helpful.

Yes I think, Brian, in general, I think that's in the ballpark of what our expectations are. We haven't been that granular in terms of discussing exactly how we get to our 1.3% to 1.5% expectations. But I don't think those are too far off. I think, we would think that there may be some additional PPNR upside as we get to a more normalized economic and interest rate environment, which should add to our growth and increase the size of our balance sheet and add NII.

I guess also on Vantiv. If it were to go public, can you just remind us all the mechanics of how that would work in terms of revaluing the balance sheet to date, the equity method earnings that would come out and then if there's any adjustments that have to be made to the warrants and puts or if that happened this quarter?

I mean, I think whether there will be an IPO in the future, I guess, is something that we aren't commenting on, obviously. That relates to another company and is not something that we would discuss anyway. Relative to how that might work from an accounting perspective, I think there's a lot of different variables that would determine that. It would determine -- it would be determined in part by what would the make-up of an IPO be. Would it be all primary shares issued by Vantiv, would it involve some of our shares. What would the resulting ownership percentage that we have be and so forth. But in general, I think we have a 49% interest in the company. That's on our books for something like $650 million. And one would need to compare our ownership percentage on a pre and post basis in order to determine what the overall P&L and balance sheet or P&L and capital impact of that would be. So I'm not sure if that's getting to what you were driving at, but.

Yes, it does. I mean, I guess is it correct to think about it as, let's assume the value that the paper talked about is somewhere in the reasonable ballpark. I mean, I guess with all the expenses and the bond refinancing you talked about, right now it's a very modest part of your earnings stream, but it actually seems like this could be a situation where if they were to partly go public, your earnings relative to this quarter could actually be the same or higher because they're so understated right now but then you have almost like a book value understatement right now. Obviously, it's correctly stated by accounting but economically the book value might be not fully reflective of Vantiv's value, and so there might be a situation where earnings don't necessarily change but the book value goes up. Is that -- I know you can't say, yes, that's correct because you don't know if it's going to go public and you don't know what the value would be, but is that like conceptually possible?

Brian, this is Jeff. I think all those things sound conceptually right but the premise is one we can't comment on. So there's a lot of complex accounting associated with this, and we can't describe every iteration of that particularly when we can't really discuss this to begin with. It's not -- it wouldn't be appropriate.

Your next question comes from Matt O'Connor.

If we look at your expenses, even trying to back out some of the stuff that might have helped this quarter that's not sustainable, it still seems like real good trends there. As we think out beyond the next quarter or 2, how should we think about you managing your expense base for, maybe there isn't a normal environment or this is normal, so that would mean loan growth, a little bit less than all of us would have thought or hoped for and fee volumes maybe a little bit less. I mean, what kind of levers can you pull on expenses, looking out to 2012 and beyond?

Well, I think as we talk about frequently, we have what we believe is a very strong expense discipline at Fifth Third. We tend to manage expenses continually rather than to have large cost takeouts at any one point in time relative to headcount reductions and so forth. We believe that in terms of the future, we'll continue to manage expenses aggressively. We have added to our expense base somewhat over the last couple of years, primarily associated with the addition of revenue generating positions, sales positions. And it funded a lot of that through expense discipline and reductions in other areas. So I think in general, we would continue to plan to approach expense management in the same way as we go forward. We would expect to see improvements in our overall efficiency ratio as we go forward but, frankly we would expect a lot of that to be accomplished more through increases in revenue than through reductions in expense.

Okay. And then separately, there's some changes in the accounting for TDRs that the industry will have to reflect in third quarter results, any meaningful change to your TDRs when you adopt those?

No. We've gone through an analysis of those new -- or that new guidance and compared that to how we've been operating and really don't see any significant differences and we wouldn't expect that it would have a significant impact on us going forward.

Your next question comes from Erika Tanawa[ph] .

I was wondering if you could walk us through the mechanics in how you're getting to the Durbin mitigation. So far, this earnings season, your Durbin mitigation has been the most optimistic thus far, and if you could take us through what the wholesale change is that you're making on the revenue side to get to that number?

Well, I guess just -- to kind of level set. I mean, I think what we've said is that in the fourth quarter, we would expect that we can mitigate about 1/3 to 1/2. That's on a gross impact of $30 million. So you're looking at $10 million to $15 million of mitigation in the fourth quarter. Of that, I think $5 million of it relates to expense reductions that have been specifically identified, and we attach a pretty high degree of certainty to those. The remainder of that benefit would come from a variety of fee income categories and relate to changes in fees that individually are not all that significant. And that's kind of the near-term view. Going forward, I think the mitigation includes those items, perhaps some increase in the impact of some of those fee adjustments that we're talking about for the fourth quarter. And then a larger impact as we go forward, as we continue to look at our product offerings, reengineer those product offerings to be more consistent with what would make sense in the kind of environment that we're in where debit interchange is going to be limited. So beyond that, I think that those larger impacts from continuing to adjust our product offerings, I think, are things that are still being considered, still being designed. We feel comfortable with the estimates that we've made and we've taken into consideration in making those estimates the fact that those aren't fully developed and baked yet and are subject to customer acceptance and so forth, but those are the things that we're looking at as we give our guidance.

Okay. And on the NIM guidance, I appreciate the very specific color and I was wondering on the loan yield side, if your margin expectations bake in a similar type of decline, particularly in C&I and auto and yield for the second half of the year, in terms of pace?

Well, I think our expectations for the second half reflect an environment that is very similar to the environment that we're in right now. So I think it reflects a low-rate environment, one in which there's a fair amount of competition. So I think it reflects a continuation of the environment that we're in, not necessarily a worsening environment and not a significant drop off in origination yields, but one in which we expect to see continued pressure on that side of the balance sheet.

This is Jeff. I have one other thing. Obviously, as we renew loans in this environment that were booked 2 years ago, let's say, where spreads were wider. I mean, there was a portfolio impact that's going to affect yields. It's predictable in the sense that we know where our loans that are going to renew were priced originally.

Okay. And one last quick question. Could you share with us what your earning in terms of ROE for Vantiv?

I think we mentioned that on the call. So our earnings in the second quarter are -- equity method earnings were $6 million. That included about $13 million in costs that are related to integration cost and the refinancing of their debt in the second quarter. So about $19 million excluding that. So is that what you're asking?

Your next question comes from Paul Miller.

On the auto side of business, we're hearing a lot of national players in the indirect auto lending is really, really pushing pricing down on price competition. Just wondering, are you seeing that and I was just wondering what -- do you think you can you just walk us through a little bit how you're pricing the auto business?

We are definitely seeing competition in the auto business, no question about that. It continues to be a pretty attractive asset, it's a short duration asset and even though pricing has been pushed down it sort of continues to be a pretty attractive asset, which probably explains the competition to some extent. In terms of pricing, we are very granular in our pricing. We risk base price and we price at not just based on 1 or 2 risk categories, it's a whole matrix of risk categories and we price based on the used versus new. So it's tough to give you a general answer to that question. It's a very granular, risk-based pricing system.

You talk about -- it's one of the few, I think, loan categories out there that is still attractive. What I'm just concerned about is that some of these big national players who are struggling with balance sheet growth, are really coming in hard in some regions. I don't know -- where some banks have told us that they just pulled back completely, but I guess in your areas, you're not seeing that much of a cutthroat competition?

No. I mean, we're definitely seeing competition. I think we feel confident that the way we're pricing and the ability to risk-base price gives us the ability to create, at a portfolio level, a high credit quality portfolio that gives us good returns. So while those returns are definitely lower than they were 2 years ago, the recruitment [ph] still are pretty good relative to the credit quality of the portfolio.

It's Kevin. The other thing I would tell you is we never exited the business. We've stayed right there all along and the credit quality of the paper that we continue to book is exceptional. And still very, very good as well as, particularly in terms of the input front [ph] piece, we have strong relationships with our dealers and dealerships as well. So we're positioned a little bit differently than, obviously, a national player from that perspective and we think that, that's a business that we can continue to stay in and continue to contribute to our growth as we go forward as we've given guidance to. So again, Mahesh is correct, we are seeing more competition but again we feel like we've got a pretty good spot in our place.

Your next question comes from Todd Hagerman.

Just couple of capital questions. On the payment process, I think Dan and Kevin, I think you have mentioned in the past that the Basel III implication on the payments unit was fairly modest and certainly with the 9:4 pro forma ratio, that seems to be the case. I'm just curious how the Basel III would possibly be affected by any potential IPO with Vantiv?

I'm sorry, I didn't get the last part of that.

I'm just trying to reconcile the Basel capital implications with the payments unit in terms of how you guys are currently looking at it today and your pro forma 9:4 ratio and how that may possibly be influenced by any kind of a potential IPO and your capital thinking?

Well, I think right now our expectation would be and our understanding is, the rules would be, there's no impact on our capital or no adjustment to our capital as a result of that investment. In terms of how that's impacted by an IPO in general, I think the only impact would be whatever gain there might be or whatever the result of that transaction is on our capital would come through but no other adjustments other than just reflecting the impact of the transaction.

It would come through the P&L, so it wouldn't have a Basel III effect.

Right.

Right. So at the end of the day, as you respond to the earlier question about, again, conceptually you improve your book value. But I'm just kind of wondering now, at the end of the day, Fifth Third is sitting on an extra hundred basis points of capital, if you will, under the new guidelines and you've kind of suggested that acquisitions really aren't in the cards, at least near term. So how should shareholders kind of think about just kind of capital management going forward, just -- it seems like, as you mentioned, you're generating a lot of capital internally, you're currently operating well in excess of kind of what you see as your kind of long-term goal, how should we think about that capital management going forward with some of these puts and takes?

Well, as you indicated, we believe we have excess capital now. We're continuing to accrete capital at a pretty good clip. Unfortunately, I think we're in an environment where we will likely have to maintain that excess capital level for some time into the future. As we go forward, certainly we are looking to deploy that excess capital both through organic growth, potential M&A activity as we go forward, but also through returning capital to our shareholders. And that our alternatives with respect to returning capital to shareholders, we believe will get better as we go forward and that we will consider things such as potential further dividend increases, potential share repurchases, et cetera, as we go forward. Obviously, those things will have to be considered within the context of the regulatory approval processes that have been put in place but those are clearly things that are in our longer-term plans.

Your next question comes from Ken Darvey [ph] .

From Morgan Stanley. Just coming back to the interchange fee increases you guys plan to put in. Have you guys looked at where your new or expected fee increases stack up relative to the rest of the industry? Because I guess I'm asking the question more from a consumer behavior perspective, that you are one of the more aggressive ones to try to offset interchange with higher fees. But does that put you at a competitive disadvantage given where your prices may stack up at the end of the day?

This is Kevin. What I would tell you is, obviously, we're very sensitive in terms of how we position it. We are looking at and we've talked openly about a value-added proposition as we migrate, really, the model from a fee-based orientation. So we'll be looking what's happening across the entire industry. But feel that confidently with what we've given in terms of guidance that not only will we be able to stay well positioned competitively but we'll continue to grow in that space as we move forward or we wouldn't be considering those. So again, we feel quite comfortable. We don't feel like even some of the things that we've already indicated to you really push us far out on the edge or the leading edge of any of those areas. The one thing I would tell you is, we've had a long time to think about this. So it's been a year and we are continuing to evaluate kind of the value propositions for growth in that arena. And we'll be adding those and making those changes in a comprehensive approach to that client segment, those clients segments. And we think we'll have a very good offering from that standpoint going forward. So we're pretty confident we can get there.

Okay. And then just one more question. On the resi mortgage portfolio, obviously you've seen a lot of growth there. Can you just remind us what your ultimate retention goals are or your willingness to put on incremental growth from here?

I think we've talked about the fact that the additions that we are making to that portfolio are coming from a retail branch originated product that is higher quality, shorter term, and primarily a refi product that has lower LTVs and so forth. And really the decision to put that on the balance sheet was one that was made within the context of evaluating our overall asset liability management position, our overall strategy for managing the investment portfolio. And at this point in time, the balance sheeting of those residential mortgages is in lieu of reinvestment -- of investment portfolio cash flows in mortgage-backed securities. So we looked at the relative values there and decided there was greater value in the mortgages that we were originating. So that will be an evaluation that we will revisit continuously as we go forward, depending upon what market conditions are and so forth. So I think longer-term, our general strategy and preference would be to sell most of the residential mortgages that we originate.

The other thing I would add is we look at that strategy very holistically. So we look at it from an asset liability perspective in terms of interest rate risk and such. But we also evaluate that in terms of our overall credit portfolio strategy and the need for diversification on our balance sheet as well as the quality of the assets themselves.

Okay. Great.

This time, your final question comes from Craig Siegenthaler.

First question, just on aggregate loan growth trends. How have balances trended in July, so 3Q to date and June relative to the earlier part of the second quarter like in April and May?

This is Jeff. I don't think we have anything. There's nothing special happening in July but we're also not prepared to talk about the third quarter in terms of weekly trends of loans.

Nothing at this point that we would change the guidance we just gave 5 minutes ago.

Got it. But I guess my point is, you didn't see stronger activity in the first half of the second quarter than in the second half was kind of steady and consistent?

That's true. I think that's what we really kind of see and continue to give guidance for in terms of our outlook.

Got it. And then just on a capital management, you're generating a lot of capital generation here and your capital levels are quite robust. I'm just wondering, when could we get back to a point when you start buying a significant amount of stock, really reducing your share count?

Well, I think we generally addressed that question earlier, which was that given our capital levels, given our results and given the limitations that there are right now from a regulatory guidance perspective on dividend payouts, that certainly share repurchases would be something that we would consider in our overall capital management activities going forward. It's difficult to predict when that might occur due to the fact that there are regulatory processes that have been put in place to get approvals for those kinds of activities. So those aren't decisions that can be made and then executed upon quickly. So I don't think we're giving any guidance as to when that might occur other than to say it's certainly something that's on our minds.

Got it.

At this time, we have reached our allotted time for today's call. Mr. Richardson, do you have any closing remarks?

No, but we appreciate everyone joining us this morning, and I hope you have a good day.