Good morning. My name is Joana and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank's Q2 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Sameer Gokhale, you may begin your conference.

Thank you, Joana. Good morning and thank you for joining us. Today, we'll be discussing our financial results for the second quarter of 2016. This discussion may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans, and objectives. These statements involve risks and uncertainties that could cause results to differ materially from historical performance and these statements. We've identified some 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 them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call. This morning, I'm joined on the call by our CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; and Treasurer, Jamie Leonard. Following prepared remarks by Greg and Tayfun, we will open the call up to questions. Let me turn the call over now to Greg for his comments.

Thanks, Sameer, and thanks all of you for joining us this morning. As you can see on Page 3 of the presentation, we reported second quarter net income to common shareholders of $310 million and earnings per diluted share of $0.40. Some offsetting non-core items resulted in $0.01 negative impact to earnings per share in the quarter. Since I became CEO in November of 2015, I have reaffirmed the bank's key strategic priorities. These include growing fee revenue, streamlining processes to reduce expenses, and improving our customer experience, and investing for the future in order to deliver strong results through business cycles. I believe we have the right strategies in place, our second quarter financial results reflect the progress we are making towards those goals. Our Q2 results were solid especially considering the market volatility we experienced during the quarter. In addition, we were very pleased with the credit results. Fee income levels including corporate banking fees were also strong. As you know, we have been building out our capital markets capabilities for the last few years. We recently hired a team to further expand our M&A and strategic advisory services. Our investments are paying off as we continue to gain market share with our expanded set of differentiated products and services. Also our mortgage volume of $2.7 billion was up 53% sequentially. This represent the highest level since the third quarter of 2013. Net interest income was relatively stable in Q2 which was in line with our expectations and guidance and our results reflect growth in commercial loans of 2% and 1% growth in security balances along with disciplined loan pricing in targeted relationship management. Origination yields in our auto loan business improved compared to Q1 reflecting our decision to originate loans more expectedly in that business. Also as…

Thanks, Greg. Good morning and thank you for joining us. Let's start with the financials summary on page four of the presentation. Overall we are pleased with our core results despite the challenging environment. Our corporate banking revenues were solid and mortgage originations have outpaced peers as well as the overall industry in the second quarter. We are deploying capital in businesses where return targets meet our long-term goals and are making good progress in executing on our strategic plans. As we shared with you previously, these projects were carefully vetted to minimize reliance on an improved economic environment. Operating leverage is the top priority with a strong emphasis on sustainable expense control without weakening our businesses strength and growing revenues. For the second quarter, there was a net negative impact of $0.01 per share resulting from several items. The most significant item was a charge related to the valuation of the Visa total return swap which was due to the rejection of the merchant litigation settlement. So with that let's move to Page 5 for the balance sheet discussion. Average commercial loan balances increased 2% sequentially and about 4% year-over-year. We achieved this growth with stabilizing spreads while repositioning the balance sheet for better risk adjusted returns. C&I loans contributed nearly 80% of the total sequential growth and average commercial balances. CRE growth of $199 million made up the majority of the remaining quarterly balance increase. Our CRE portfolio as a percentage of total commercial loans is one of the lowest among our regional peers. In construction, as well as in term lending, our teams are cognizant of valuations and supply demand dynamics created by the lack of attractive investment alternatives. As Greg mentioned, our disciplined client selection and credit underwriting in CRE will continue to rely on stringent…

Thanks, Tayfun. Before we start the Q&A as a courtesy to others, we ask that you limit yourselves to one question and a follow-up and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in the time we have this morning. During the question-and-answer period, please provide your name and that of your firm to the operator. Joana, please open the call up for questions.

[Operator Instructions]. Your first question comes from Ken Zerbe with Morgan Stanley. Your line is open.

Just to be really clear on the TRA. So I get that you executed on the $116 million that seems to be a locked in gain. Just the way the pressure it reads about the additional what the $394 million, I guess you get $171 million coming in, I just want to make sure that is -- is that a locked in gain in third quarter such that if you go on Slide 12, you get $279 million gain in third quarter?

Yes, Ken. So these are basically put and call structures. We own a put option and Vantiv owns a call option on a quarterly basis on predetermined cash flows. And both of these options basically removes the contingent fee associated with the TRA cash flows and therefore we are required to book an upfront asset for the present value of these assets which will basically result in $163 million pre-tax gain in Q3. So we will book an asset of $163 million on the pre-tax basis. And then we have basically the cash payment of $116 million that we will be receiving for the $331 million in gross cash flows, so that's the combination of the two.

And Ken, this is Jamie. One nuance to the CCAR approval and Tayfun's reference to realized after-tax gains, when it comes to capital deployment of these gains the $116 million because it is recognizing and realized would result in our ability to deploy that capital on an after-tax basis in the $76 million or so range this quarter. And the reason we broke out Slide 12 the way we did was to show you that the capital deployment related to the recognition of the asset for the receivable, the $163 million would be deployable as those puts and calls are exercised and cash is exchanged in the quarterly installments you see in 2017 and 2018.

Got it. So the right-hand chart basically so the left-hand chart as you book an asset of $163 million, the right-hand chart says as the cash comes in you don't recognize the gain, you simply isn't offsetting asset.

Correct.

So capital goes up and asset goes down.

Correct.

The next question comes from David Eads with UBS. Your line is open.

I wanted to talk about the NII outlook. It looks like there was on a ending -- end of period that basis there was a pretty big ramp up in securities. Was there anything unusual with that strategy there and I guess should that benefit the NII outlook in next quarter, was there anything unusual positioning on the securities there?

Yes, good question, one item related to the end of period balance sheet versus the average is that the end of period includes the unrealized gains and the average balances do not. So good news is we had a $1.335 billion unrealized gain in the portfolio that makes it looks like on an end of point basis we had added some leverage. But to your question in terms of the outlook on the portfolio, the one assumption in our NII outlook is that given the low rate environment, the flatter curve, and the tight spreads, we don't expect to reinvest portfolio cash flows in the third quarter of roughly a $1 billion or so during the quarter so that you should expect on the securities portfolio that average balances would be stable to down slightly from second quarter to third quarter.

All right, that's very helpful. Thanks a lot. And maybe you talked about the two to four basis points NIM pressure in 3Q, if we assume no rate hike just simplicity, should we expect more pressure on NIM going forward or what's the kind of headwinds around the loan, the debt issuances come through, can NIM be a little bit more stable from there?

David, I think the NIM contraction looking forward, we gave you some guidance for Q3 and there may be a little bit more left in contraction if rates do not go up and obviously these comments depend on the shape of the yield curve. But over the long-term if we all see an environment like todays in the next year or two, our expectation is that our NIM will be fairly stable. I mean there may be some contraction from here but it's not going to be a continuous bleed out of the NIM. We expect that given our risk exposures and interest rate risk management approach we will be able to stabilizing them.

Your next question comes from Ken Usdin with Jefferies. Your line is open.

Good morning, Ken.

Hey good morning. Guys just wanted to ask you a question on the fee outlook. So this quarter seems like you had the servicing hedge was a bit of a delta and you mentioned the good pipelines you have on mortgage. So I just wondered if you could help us understand this, the drivers of core income, its impact is just mostly related to kind of getting that back on the mortgage side or do you also continue to expect good growth in some of the core fee line items?

Yes so let me make a couple of comments on fee seasonality. Obviously given the rate movements, we do expect a good quarter in mortgage. I think our pipeline look strong at the end of the second quarter which should play well for the third quarter and also we had a very strong corporate fee performance in Q2. Typically we would see some weakness just general seasonal weakness in the summer, in corporate fees but we expect a healthy environment in Q4 and so good corporate growth in Q4 and we would expect the other fee lines in general to be stable. So our expectation of a second half sort of strength in fee income relates to continued strength in mortgage here in the near-term and then good corporate strength as we approach the end of the year.

Okay, great. And if I could follow-up on the TRA comments, so the $163 million that is in asset, when you get the cash flows back next year, are you able to buyback the amount of the cash flows that are laid out on the right side of Page 12?

Yes but on an after-tax basis. So the TRA payments from Vantiv to Fifth Third will need to be tax affected for capital deployment.

Right. I just want to, I think there is some confusion so the $116 million you're very clear on that you can do right away, the $163 million --

In the tune of $76 million, yes.

Right on after-tax basis. And then the $163 million comes through and the cash was received on the right side but on an after-tax basis you could then buy those back but only as they recognize along that schedule of 2017 and 2018?

That is exactly right.

Okay. And you didn't sell any shares this quarter, so that still is an open-ended question to about what's the thought process behind when and your decision tree is behind incremental actual share sales?

Ken, this is Greg. This discussion comes up quite a bit. We've been very, very disciplined on how we monetize our equity position at Vantiv. I would say we continue to look at what's the right thing for our shareholders. I want to continue to do that as we move forward in the remaining of this year. But we have been disciplined as rewarded our shareholders very well, it's something we always consider and we will continue to consider and evaluate as we move forward.

Your next question comes from Paul Miller with FBR & Company. Your line is open.

Good morning.

Good morning.

Hey guys. This is Tim for Paul. Touching on the average loan growth outlook that 2% how does that stack up your expectations from last quarter. I believe you guys have mentioned 3% growth on the commercial side on the last call and so should commercial loans still grow at a faster pace than the rest of the portfolio?

Yes so what I think, what we shared in the past is that we would expect to outpace GDP and that's exactly what we delivered. For this quarter particularly in commercial loans, you saw good growth, very diversified across our markets, across a number of businesses that we continue to emphasize, invest in, and we would expect that we would have that same type of performance throughout the balance of the year as Tayfun has previously guided.

Okay. Understood and then just kind of that end, the dropdown of provisions was that solely due to an improvement in credit and outlook for credit or do reflect a change in loan growth assumptions that $91 million that you guys did this quarter; is that a good base for provisions that grow off or should we see further improvement?

Yes first of all we -- I just want to make sure that everybody understands our coverage ratio remained at 1.38%. So we did not drop the coverage ratio, it's just reflective of the loan growth and it's a quarterly analysis and you went through our analysis that credit trends look good and we just provided $4 million. Going forward, as I commented, I think provision will reflect loan growth.

Your next question comes from Matt O'Connor with Deutsche Bank. Your line is open.

A couple of follow-ups on topics that have already been covered a little bit. But just on the commercial loan growth, I guess why haven't we seen more growth there, I know there have been some de-risking going on and you have been very focused on pricing but I guess when do those factors run its course and you get back to may be kind of more industry commercial loan growth levels?

Well first of all, I would tell you, we feel good about our commercial loan growth for this quarter, it was largely in line with our peers. I mean we've had some headwinds as we have repositioned our portfolio as we've decreased exposures to non-strategic relationships in industries such as commodity sector of it. This is really about not overreaching and focusing on client selection and thus we're going to focus on what we can control. And frankly we're doing that, if you look across all of our business, all of our verticals we are seeing some excellent growth, we are continuing to expand those, we're seeing growth across our core middle market franchise that's very promising for us. So when we would expect to see any significant change in us relative to say H8 data, very difficult to tell. We are going to focus on what we can control and that is building deep client relationships with attractive returns for our clients very deliberately so that we prudently use our capital and our liquidity and frankly we would build long-term relationships with our clients.

And this is Greg, the only thing I would add to Lars comment, this is one of our core strategies, building our balance sheet could be good for the cycle but we've been very selective on the relationships, the geography, asset diversification extremely important. We're very pleased with the commercial loan growth that we saw in this quarter, it's consistent with our strategies as we move forward.

Okay. And then may be a follow-up on NIM for Tayfun or Jamie, I think the comment was beyond the third quarter, I think you can keep the NIM relatively stable even in this rate environment and which is helping to get a little more color on that. That's obviously better than peers and will be an accomplishment in a difficult rate environment. So you mentioned some hedging and swaps for tax but just elaborate a little bit on how you keep NIM stable beyond 3Q?

Yes, Matt, I think on NIM and what you've seen from us the past couple of quarters is that most if not all of our contraction are from things we've intentionally done whether that's debt issuance or the sale of some of the non-strategic assets that we've completed. And going forward the NIM compression whether it's the third quarter or perhaps even after the third quarter again would if we were to have compression, it would be based on things we're intentionally doing if we were to have more debt issuances that could be factor to drive a little bit more compression but overall we're pleased with how we position the securities portfolio, as Tayfun mentioned the bullet and locked out cash flows and we're not susceptible to this low rate environment over the next few quarters. But if this environment were to continued for an extended period of time then it would be more challenging to have stable NIM, but at least over the foreseeable future, we feel like we positioned the book as well as if we could for this lower from longer environment, we've talked you guys about that over the past two years as we built the securities portfolio. And then but one factor you haven't heard from us over the past four quarters is the fact that loan yield compression just really hasn't been a factor in our NIM and given the pricing strategies and success that we've had executing on the loan side, we think we can continue to deliver stable NIM as the loans come on the sheet as yields were comfortable.

Yes, Jamie just may be tag on to that we are being very deliberate in terms of our disciplined credit pricing, and as Greg had mentioned our client selection. We are very focused on businesses in markets in which we believe that we can outperform and frankly that has really helped us to stabilize those loans spreads. In a couple of areas we've seen some slight improvement. We're going to continue that that strategy. I would tell you that post-Brexit, we have seen a little bit more competitive environment but we're going to continued to stay focused on this strategy it's producing the right kinds of outcomes specifically consistent with what Greg has shared previously.

Yes and I also want to clarify that I did say that, we may see just a few more basis points in Q4 based upon what Jamie just mentioned about some capital market activities but beyond that I think for looking out another two, three quarters I think we expect stability.

Your next question comes from Matt Burnell with Wells Fargo Securities. Your line is open.

Good morning. Thanks for taking my question. Just wanted to follow-up on the comment you just made in terms of your how deliberate you are, you've been in terms of client selection and pricing. I'm curious either in terms of other markets where there is greater pricing pressure and therefore more pressure to try to get clients to drive fee income within your footprint or those more in the lending offices that may not be in the middle of your branch footprint.

Yes so, I mean we do see variation geographically from quarter-to-quarter, year-to-year and clearly we have some markets that are more competitive than others. But I'll tell you our value proposition what we're delivering is being very well received. I'll give you an example, Chicago. This is a very competitive marketplace. We've seen and in fact that's been our fastest growing regional market that we have in our footprint, every day we are having to earn it client by client, but also I would tell you across the industry verticals, we continue to focus on put stacking our resources against those opportunities where we can get the best returns. But it's not just about the balance sheet; I'll remind you it's about the total client relationship. And it's one of the reasons that as Greg shared, earlier we continue to invest another fee sources and solutions to build out an advisory based relationship with our clients and frankly that's helping to drive the P&L also for us. So I think that this is all coming together nicely for us.

Okay and for my follow-up with Tayfun may be if I could follow-up in terms of the 5% fee growth guidance. I just want to make sure that we understand the basis of that that excludes any Vantiv related gains, but it includes other sale gains or all of those excluded the way you would exclude them for core fee income?

Yes, so first of all the base compares in 2015 is about a $2.3 billion number. So our report number was I think $2.4 billion.

Right.

So you just exclude -- I'm sorry $3 billion so you exclude all the Vantiv related gains in 2015 you get to a point $2.3 billion. The 5% is relative to that number excludes any Vantiv gains. The only gain really that -- it also excludes obviously the branch gains as well. So it would be from our perspective a core performance this year.

Okay. That implies a relatively greater growth in the second half in fees roughly about 9% by my calculation, in the second half versus the second half of last year. I appreciate that you expect to rebound in the fourth quarter in corporate fees. But that seems a bit stronger than then you've had previously?

I think our numbers may not necessarily compare, well I wouldn't get to a 9% type number. I think you already know our first quarter and second quarter numbers if you exclude the gains that were booked against the branch sales. So I would basically advise you to follow that 5% growth off of $2.3 billion take out the first half and then look at the remaining two quarters. Again with some weakness incorporated in the summer, but they pick up in the fourth quarter and strengthen mortgage in the third quarter. So those are how we are getting to our 5% number.

Okay I'll circle back with Sameer to get my numbers right, thank you.

Okay.

Thank you.

Your next question comes from John Pancari with Evercore. Your line is open.

Good morning it's Steve Moss for John Pancari.

Good morning, Steve.

I wanted to touch base on the European exposure that you have. Do you plan to grow it further or reduce it further?

Yes, so I think as we've underscored previously and is in the earnings that that we have relatively light exposure in Europe. Let me just reinforce what our strategy is. Our focus is on developing relationships with European and in some cases Asian based very typically large strong corporate parents that are focused on expanding into the U.S. where we can deliver domestic services to them that that's our key strategy. So are -- do we plan to grow that in the future, I would say yes. However consistent with our Brexit and EU plans and processes and market risk review, we're going to continue to be very cautious about that. But I would see this as an opportunity for us to continue to grow our domestic franchise and build some attractive relationships while we do see some disruption in the marketplace.

Steve this is Greg. And it's important once again that we stick to the strategy that we put forth in support of our international relationships. You've watched us also over the last couple quarters simply reduce our exposure same relationship it doesn't meet our strategic objective.

Okay. And then also on the CRE downgrade that you guys disclosed earlier in the month just wondering if there's any incremental work related to that or and/or if there's any restriction on M&A activity?

This is Greg. First off we're very disappointed in that downgrade. Let me remind everybody that was poor period of 2011 to 2013. It was not reflective of CRE activity with respect to lending investing in our service commitments. Actually we scored satisfactory outstanding in all those areas. It really is reflective in other agencies issues with respect to some lending activities that were all closed out recently. So that was disappointing. Also look that the Group know that the Fed will be in later this year to perform the next exam that will go up through mid-2016 and we're very confident that rating will be changed very shortly so that's kind of state of the environment. With respect M&A and there is still opportunities, if you go in to bank M&A it's been very, very low on our priority, bank M&A I mean it's at the lowest level of our priorities for how we deploy our capital. We still think in this environment that we trade today the buying back our equity is the best use of deploying our capital. So we don't see this impeding our ability to deliver on our strategies and once again will be back in later this year, perform the next exam.

Your next question comes from Christopher Marinac with FIG Partners. Your line is open.

Thanks, good morning. I just wanted to reinforce the NII conversation of earlier, how do you feel about growing NII in 2017?

It's going to be a function of earning asset growth. Again depending upon obviously rates moves but assuming that there are no more rate moves over the next 18 months then NII growth will be a function of earning asset growth. I mean beyond that I think it's tough to necessarily predict what happens to credit spreads et cetera. But assuming some stability reflective of the current market conditions it will depend upon our ability to go earning assets.

Okay, great thank you for that. And then just a follow-up on the energy book. Is there any way to handicap how the snag example go this fall for the next round should that be less owners would been earlier this year.

Good question. This is Frank, thanks for the question. And as you know, the first quarter that exam was focused very heavily on energy type of what we know those follow back up they'll go back and look at the same portfolio and the same credits that they evaluated in the first quarter what's changed obviously the price of oil per barrel has stabilized down a little bit last week or two but far higher than where it was before. We are -- when you look at our price tax and when you look at our all of our scenarios that we run from base to stress the price of oil is well above, well above that. So I don't think this is going to be near as much noise depending on where price moves between now and then. We moved eight credits over in the first quarter that were all but one reserve base credits the non-accrual but we have very little if any loss forecast from those credits. Our portfolio is stable at this point and as you know our portfolio was only 2% of our total book its small, it's certainly nominal. We manage it very well, we manage it through our vertical and our outlook for the rest of the year is really unchanged based on what we know today.

Your next question comes from Mike Mayo with CLSA. Your line is open.

Hi, what inning are you in for the ramp up in investment spending and what inning are you in for the savings from all of your initiatives. I can elaborate a little more, the investment spending you mentioned digital regulatory back office on investment side and on the saving side you mentioned vendors, facilities, offshore, mortgage loans system, commercial loan system, and the branch closings.

Right, those first up where are we as I mentioned before Mike we're at this will be the high watermark we believe for investments and technology and from a regulatory perspective investments we have to make. We've been focused on, very focused on as how to implement those opportunities of strategic investments in a most provable way and you've seen us accomplished that's why we brought our guidance down expenses for the remainder of this year and total for the year. So we feel pretty good about what we are at on from an expense position on our investment. This will be the high watermark so we're in the later endings of that. We're also starting to realize some of the value created by the focus we put on reducing our infrastructure, also the branch reengineering, personnel reengineering, investments we made to renegotiate our contracts such as Vantiv, MasterCard, and I go down the list. We're starting to see those benefits hit us actually in the second half of this year you'll see more that as move into 2017. So once again I know as you are we are we're very focused on positive operating leverage and we fully expect, there are plans and our actions will get us there in 2017.

May be just a follow-up on the savings, where do you stand with the closing of the 100 branches?

Yes we've completed the closing of 100 branches with the sale of Pennsylvania for a $11 million gain last quarter. So, we'll had a full year, full year run rate established by the end of this year that $60 million will be full run rate going into 2017. Once again we will remind you Mike that's an annual exercise as our consumer preferences evolved we will continue to assess our opportunities and then may be more opportunities as we think about 2017.

And last follow-up just if you add in all the savings from the other initiatives too I guess you haven't really given a number of that but your goal is for positive operating leverage when starting in 2017 and do you have a number for all of those?

Mike we are not giving 2017 guidance but clearly going into the planning period that's our target for all of our businesses and staff functions.

And Mike everything we do we put to the lens doesn't meet those objectives that I step forward with ROTCE and ROA and our ability to execute. But thank you for the question.

All right, thanks.

Your next question comes from Geoffrey Elliott with Autonomous. Your line is open.

Hello, thank you for taking the question. On the Vantiv transaction, I think I understand the economics, but what was the rationale for the second stage of the transaction being this so-called option structure?

So clearly the goal of the CRE transactions both from last year as well as this year was to ensure that from a risk management perspective and this is risk related to corporate tax rates that taxable income et cetera, to make sure that we have visibility to the value of those cash flows. And clearly this is an agreement between us and Vantiv; it's a function of their ability to engage in cash transactions upfront versus using cash availability in future periods.

Thanks. And then just one more quick one. There was this news earlier in the week about the Chief Legal Officers leaving because of a conflict, I wondered if you could elaborate on that little?

First that's always a difficult situation. So comment I've ever made and we've made as a bank is there was a personal matter that's been brought to our attention if their belief represents a conflict of interest. So to resolve those we've determined the best course of action was a separation. And it was a very qualified lawyer in this manner has nothing to do with any of the legal work done by Heather doing the tenure in her time to fit their naturally all I can say.

Your last question comes from Kevin Barker with Piper Jaffray. Your line is open.

Thank you. During this quarter I mean obviously position that mortgage banking may be better in the third quarter, but you also experienced quite a bit of decline in gain on sale margins versus the previous quarter and the first quarter was obviously higher than what we saw from a run rate. Was there any particular hedging losses or something that caused the severe decline?

No, there isn't. I think the gain on sale margins are a function of channel production also the realization of the revenues during the quarter into the quarter. So it's not necessarily reflective of anything specific going into the third quarter we would expect more of a stability if margins are looking good for them.

Okay. And then in reference to the MSR valuation adjustment of a positive $6 million. The rate movement in the second quarter was less severe than we saw in the first quarter. Was there less hedging gains this quarter as well in regards?

In which part are you talking about MSR hedging or are you talking about in the production side pipeline hedging?

The MSR asset.

No, I mean on the MSR side our valuation, net valuation last quarter was $11 million and $6 million this quarter. And it really ultimately and it would have been fairly tight in terms of our hedge coverage. So it really comes down to the last day of every quarter where we stand in the valuation of those.

There are further questions in the queue at this time. I'll turn the call back to the presenters.

Thank you, Joanna, and thank you all for your interest in Fifth Third Bank. If you have any follow-up questions please contact the Investor Relations department and we will be happy to assist you.

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