Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Banc Earnings Conference Call. [Operator Instructions] I will now turn today's call over to Mr. Richardson, Director of Investor Relations. Sir, you may begin.

Thanks, Alicia. Good morning. Today we'll be talking with you about our second quarter 2013 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 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. I'm joined on the call by several people: our CEO, Kevin Kabat; CFO, Dan Poston; as well as Greg Schroeck from Credit; Tayfun Tuzun from Treasury; 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. Fifth Third reported second quarter net income to common shareholders of $594 million and earnings per diluted share of $0.66. Earnings this quarter included a benefit from gains on the sale of a portion of our Vantiv stake and a higher valuation on the Vantiv warrant, which, together, contributed about $0.22 of benefit. There were a few smaller items during the quarter that were modestly detrimental on a net basis, which Dan will discuss in more detail. Year-over-year, earnings per share increased 22% excluding the impact of Vantiv in both quarters. Return on assets and equity were strong with and without the Vantiv benefit, and tangible book value per share increased 1% sequentially and 7% from a year ago despite the fairly significant impact of share repurchases. Now turning to the business activity. Average sequential portfolio loan growth was 1%, with C&I loans up $1.2 billion. Average portfolio loan growth from a year ago was 5% with average C&I and Residential Mortgage portfolio loans up 15% and 9%, respectively. Period-end loans increased 2% sequentially and 6% from last year. These comparisons include the impact of a $500 million auto loan securitization during the first quarter. Average core deposits continued to grow and were up 4% from a year ago. Transaction deposits increased $4 billion or 5% including a very strong 13% growth in demand deposits, primarily in consumer, but with good growth in commercial as well. Fee income results reflected solid loan growth -- or solid growth from seasonal softness in the first quarter and we produced strong performance in nearly every line item. Corporate banking revenue, mortgage banking net revenue, deposit service charges and card and processing revenue were up mid single-digits. Certainly, things have changed in the mortgage business, but the second quarter for mortgage was…

Thanks, Kevin. I'll start with Slide 4 of the presentation, and I'll discuss results for the second quarter before turning to the outlook toward the end of my remarks. Overall, we posted strong results this quarter. Earnings per share were $0.66, up $0.20 from last quarter. There were a number of items affecting second quarter results, including a $242 million gain on the sale of Vantiv shares and the $76 million positive valuation adjustment on the Vantiv warrant, which, in aggregate, benefited earnings per share by $0.22 for the second quarter. Vantiv warrant gains were $0.02 benefit in the first quarter. There were several other smaller items that affected earnings in the quarter, which are all outlined in our release, and I'll note those throughout my comments. Turning to Slide 5. Tax equivalent net interest income decreased $8 million sequentially to $885 million, in line with our expectations, and the net interest margin was 333 basis points versus 342 basis points last quarter. The decline in net interest income included a $12 million negative impact from maturities of interest rate floors and a $6 million benefit from higher quarterly day count. Otherwise, the remaining $2 million decline was driven by loan repricing, partially offset by the benefit of net loan growth, higher yields on investment securities and lower long-term debt expense. The 9 basis point decline in the net interest margin included a 5 basis point reduction due to the maturity of interest rate floors and a 1 basis point reduction from the day count effect. On the loan side, yields declined primarily in the C&I and auto portfolios. Reported C&I portfolio yields were sequentially lower, although 13 basis points of the decline was the result of the maturity in the interest rate floors previously discussed. The remaining decline was…

[Operator Instructions] Your first question comes from the line of Matt Burnell of Wells Fargo.

I guess, I'm just curious, first of all, in terms of what you're seeing in terms of demand for commercial loans. Obviously, C&I loans were growing a little bit faster than the rest of the portfolio. I guess, as you look across your geographic footprint, are there any particular markets that are seeing a stronger growth or have you seen any effect from some of the currency fluctuations that might have dampened demand across your footprint over the quarter?

Thanks, Matt, this is Kevin. Let me kind of address that and Dan, if you got any additional comments, you can make them. But what I would tell you is that we've seen demand pretty broad-based. I wouldn't tell you that it was specific in terms of any geography. We're also seeing it broad across industry types. And so we're relatively pleased given the environment. We did see a little bit of increase in pay downs in the first -- or in the second quarter. I think -- and in reaction to kind of the Fed's announcements, I think CFOs were really kind of looking at their debt and trying to lock in or pay down some of the low cost that they had. But for the most part, pipelines continue to be robust and, again, broad-based across both geography and industry type from our standpoint. So I don't know if there's anything else Dan, that you'd add to that commentary.

No. I guess, the only comment, I agree the growth has been pretty broad-based. But I think we have seen particular success in the southern regions where we continue to capture market share, so I think we've probably got a little bit of bias to growth to some of the markets in the South but, in general, making good progress and seeing growth across our geographies.

And the only other thing I'd add, too, Matt, is we -- the investments that we made and have continued to make in our verticals continues to pay dividend for us. Whether it's the energy vertical, the health care vertical, those continue to be good opportunities for us. And we still are winning fairly well in that space. So we feel good about those investments and our outlook there.

Yes. I think to follow up on that, in the areas where we've made investments specifically in mid-corporate capabilities, the health care vertical, the energy vertical, we're seeing growth rates in those areas significantly in excess of the overall growth rates in C&I. So those investments continue to pay pretty good dividends for us.

And then the last comment I would make is, as we mentioned in our scripting upfront, we saw -- although it's a much smaller portfolio than it has been historically for us, we saw a growth in our construction space that, obviously, will mature. And to our commercial mortgage, we've been quite deliberate in our focus around that space. And our expectation is that, that will no longer -- by the end of the year or first part of next year, that it will no longer kind of drain assets from the balance sheet, but we think that we can -- are finding attractive enough projects and beginning to invest in that, that we can be either be the end of its decline and hopefully, again, be an opportunity for us to increase a little bit of our exposure as we look out.

That's very helpful. And if I can just shift the gears a little bit to the mortgage side of things. I appreciate the detail you provided in your outlook relative to mortgage banking revenues. But I guess I'm just curious if you could provide a little more color in terms of how you're thinking about taking the cost out of that business, as the refi boom comes -- slows back down. Is it -- are you thinking more in terms of sort of a 1- to 2-quarter lag or is it potentially a little bit longer than that?

Well, we've talked a bit about this in the past, and there's a fair amount of expense within the mortgage business that is variable with respect to, in particular, the compensation-related pieces that vary with originations and with revenue. Beyond that, there are some fulfillment expenses that are variable that -- but that do require actions on the part of management to actively manage those expenses, and do involve or require some time in order to make those adjustments. So as mortgage revenues and expectations for mortgage revenues have declined, we have begun actively managing those expenses. We have plans to take out temporary labor, contract labor, reduce our FTE through reductions of those kind of third-party headcount as well as reductions in overtime. And we will be working over the quarter to bring down overall expense levels in the mortgage environment to be consistent with the revenue expectations. As we sit here right now, if you look at our revenue guidance, we've talked about a 20 to 25 basis -- or excuse me, 20% to 25% decline from the $162 million in non-MSR related mortgage revenue in the second quarter. That's about $40 million in round numbers. Our expense revenue or our expense expectations for the third quarter would be that we can take expenses down equal to about 2/3 of that revenue, which is pretty much in line with the overall kind of efficiency levels in that business. So that's about $25 million in the third quarter. And we will continue to evaluate other opportunities to make further changes in the mortgage business that are consistent with our kind of the intermediate and longer-term expectations for what that business contributes.

Yes, Matt, I'd kind of put a finer point in terms of your question. I think Dan has given you kind of a good overview. I'd just make a couple of comments there. One, this isn't a surprise to us. It shouldn't be to you either in terms of the mortgage refi business changing. So obviously, we've been anticipating the turn and when that was going to happen. We'll be aggressive in managing our business and we expect to get, as Dan kind of highlighted to you, most of that expense out quickly and no more than 2 quarters in terms of addressing that business, dependent upon the sustained level of demand. That's what we'll size the business to from that perspective. So you'll see us all over that.

This is Jeff. I would just -- one thing I would add, I think we've discussed this kind of 60-day lag between taking expenses out and revenue. That 60 days has kind of happened because this started in early May. And so we are acting in the third quarter just as you would expect, given that, that's happening.

Okay, that's helpful detail. And I guess one final question. We've started to see a little bit of M&A occur in smaller size banks within the Midwest and within a couple of specific markets within the Midwest where you have some operations. I guess I'm just curious, given your relatively strong capital position, if there is increased interest at this point heading into 2014, with the capital rules now sort of relatively well understood to increase your footprint penetration within the Western part of the Midwest.

Yes. I would tell you, Matt, clarity is helpful. And so getting that -- getting our arms around that is helpful as we look at it. As we've indicated and as we've talked about in the past, we grew up as an acquirer, we know that there'll be a time for consolidation that we'll be at the table for. We look at these things, obviously, in terms of use of capital and all of the other metrics we've outlined for you in the past relative to where we'd have to pass our hurdle rates. And obviously, if it's within footprint, we're both aware of it, understanding what's going on and look at that as opportunity to have greater density within our footprint. And we think that strategically makes the most sense to us as we look out. And so, again, I think that all of that fits within our purview, all of that fits within our strategic orientation and we'll continue to monitor what that looks like. If there's something that we think really is interesting and is -- fits within those parameters, yes, we would -- we'd take a real hard look at it.

And the one thing, you started this with our high capital levels, and I think we would not look at our high capital levels as increasing our desire to do M&A. I think we would look at M&A as something that we would do when the deals are right in the right time. But we can also buy back our own stock with that capital. And we have to look at the value of that trade versus buying somebody else's stock. So we'll -- we don't view that capital as something that we've got to get rid of.

Your next question comes from the line of Matt O'Connor of Deutsche.

I've got a few just nuance questions here, so apologize in advance. But first on the share count, what share count should we be using whether it's 3Q or 4Q? You've got some forward settlements that -- there's a full impact that needs to come from that. I don't know if that includes the Vantiv gain. There's just a few different pieces in the buybacks so maybe give us some insight in terms of what's already been announced or already planned for, as we think about the share count on a diluted basis.

Well, so that's a tough one to answer because the third quarter share count is going to include things that we do in the third quarter. And we haven't just given -- we haven't given guidance on that, and we haven't acted on it. I think I would hesitate to give you a share count for the third quarter.

Okay. I mean, maybe putting some of the moving pieces out there.

You can take our CCAR plan and then kind of assume what you're going to assume for the timing of the remaining $600 million in repurchases, and then you'll come up with a share count that hopefully will be in the ballpark.

Right. So there's the $600 million remaining, there's still a $15 million benefit, I think, from what still needs to be settled that's in the period end, but not the average or something?

Yes, there's still a small settlement amount that -- $15 million, is that right?

Yes, it's always the stub amounts at the end of the completion period, that would create that. I mean, that's sort of related to how we execute our accelerated share buybacks.

Okay. And then the Vantiv gain that you realized this quarter, the $150 million in change, you would be allowed to buy back stock with that, in addition to the $600 million and the forward settlement that's still out there, right?

No. The $600 million incorporates the fact that we already have approval for Vantiv. So the share repurchase that we did in May, plus the $600 million equals the total for CCAR plus Vantiv.

Okay, all right, that's helpful. And then just separately, I know the tax rate's been coming in a little bit higher the first couple of quarters this year, but you're still sticking to the outlook of, I think, 28.5% for the full year, which obviously implies a decent decline in the rest of the year. I mean, I'm just trying to figure out kind of what's going on with the tax rate overall. And as we think out longer term, is that 28.5% kind of a good run rate to use?

I mean, the tax rate is -- we kind of reset it this year. It's been fairly stable in that 28.5% range. I think we were -- because we have seasonality in the first quarter, the tax rate's a little high. So second half of the year, 28.5%, 29%, somewhere in there seems about right.

Okay. And then just separately, actually one other small thing, so the preferred dividend is $15 million every other quarter. So we should just pencil -- that's the only piece that's out there once this other one is converted. So we just pencil in $30 million per year starting next year?

Yes. But it will be $15 million every other quarter, not $7.5 million per quarter.

Yes, got it. Okay. And then separately, if I may, just kind of a bigger picture question. You've talked about how you have one of the smaller securities books of there and that you've got a lot of capacity to add to it over time if rates rose, and you chose to -- I did notice the period end securities was about $1 billion higher than last quarter and the average. So just thoughts on where rates are right now, both your capacity and interest in adding more securities to your period-end levels?

We don't view the current rate environment as the end game environment. The reason why balances have increased this quarter is really more due to our decision to reinvest some of the expected cash flows that are coming back to us from the portfolio. Our anticipation is that rates will continue to inch up as we get closer to the end of QE as well as sort of the eventual, whether it's end of '14 or in '15, starting increasing short-term rates. So we have not fundamentally changed our investment strategy. This is probably somewhat of a temporary increase in investment balances. But clearly, we evaluate our opportunities and options and we will make the right decisions. But this particular quarter's increase in balances is not a permanent change in our investment approach.

Said it another way, Matt, the $1 billion increase in the end of period balances that you see is an acceleration of assumed investments in the NIM and NII guidance that we gave reflects that as an acceleration of investment of cash flows and not as a permanent increase in the level of portfolio at this point.

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

First question, just on capital. With, I guess, the positive changes that we've seen to Basel III capital ratios, when you look ahead to 2014 and your Basel III number is higher than where you previously thought it was going to be, do you think that gives you any more flexibility under the 2014 CCAR process to ask for more capital return than you may have otherwise, under different Basel III rules?

Well, we're certainly hopeful that having some final rules creates some clarity that allows the CCAR process to be a little more transparent and for both us and the regulators to have a little more certainty with respect to what capital levels need to be going forward and how we should manage those. So I think net-net it's a positive in terms of removing an additional uncertainty, which might allow us to do things in our CCAR plan that otherwise we might have been a little hesitant to do because of that uncertainty. So I think on the margin, the impact that you're talking about may be there, yes.

And then just one final question. On Page 5, you had a chart showing C&I loan yields. I guess it's down another 32 basis points this quarter to 3.58%. When we think about where you're putting on new loans including any fees that might be in there as well, what's the right or what's the current level of C&I yields? Just to have a base of where that might bottom out.

Yes. I think as we stated, Ken, this quarter, we had the impact of expiring floor maturities on our C&I portfolio yields, so that was a large impact on yields. As we think about yields and spends going forward in that business segment, there are several factors that impact that line item. One is just the fact that incoming loans clearly are of different credit nature, better credit nature compared to outgoing loans. That is fairly clear from the activity that we see. The other one is the impact of the overall credit spreads, both in capital markets as well as bank loan markets. Credit spreads continue to tighten during the first half of the year. And that activity impacts our bank loan spreads and impacts the prepayment behavior in that portfolio. The other one that we have to keep in mind is that as a company, we have and we continue to approach that business from a relationship perspective. So the credit spreads are just a portion of the relative returns in that business and we are clearly seeing increased fee activity. And our internal return targets and profitability ratios take into account noncredit segments in that business. Now having said all of that, I think when you go through a change in the rate environment that we've experienced over the last sort of 6 to 8 weeks, that tends to sort of, hopefully, create some changes in spread trends, and we may see some of that going forward. In general, we expect the credit spreads to stabilize, but we are cautious because that necessarily is a little bit dependent upon what happens in capital markets, what happens with competition, how they price loans. So in our guidance with respect to NIM or NII, we tend to be cautious in how we think about commercial yields. But clearly, this quarter's particular drop in yields has been outsized and largely impacted by an expiration of floors. So I wouldn't extrapolate what happened this quarter into future quarters.

Your next question comes from the line of Paul Miller of FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: On -- coming back to the mortgage side, correct me if I'm wrong, but you're mostly a refi shop. What type of things are you doing to try to increase your purchase market or are you just comfortable with the mix shift you got right now?

Yes. I think in the quarter, in the second quarter, about 1/4 of our volume was related to purchase mortgages. So I think we do have a fairly sizable portion of our business that's purchased business. That increased significantly during the quarter. Purchase volume was $1.8 billion of the $7-plus billion in originations. In the quarter, that was up 80% from $1 billion in the first quarter. So I think we're seeing increased purchase volume. That's the result of a number of things. One is we've given more attention and focus, obviously, to purchase volume as the environment has started to shift. You get the seasonal benefit of the selling season that starts in the second quarter and continues into the third. And continued stabilization and improvement in real estate valuations, and the real estate market is helping there as well. So we have a sizable portion of our business, in the second quarter, it was from purchase volume that will be a greater percentage, obviously, as we go forward and the refi portion of the business wanes. But were confident in our ability to capture our share of purchase volume and think we're doing the right things to increase purchase volumes as we go forward. Paul J. Miller - FBR Capital Markets & Co., Research Division: Can I be -- correct me if I'm wrong, I don't believe that you guys have a lot of eligible loans in your portfolio because you weren't -- your portfolio's relatively clean. Am I correct or are you doing HARP?

Depends on who you compare us to. But in general, we would say that our portfolio is much cleaner relative to a large number of our peers. Paul J. Miller - FBR Capital Markets & Co., Research Division: But are you doing HARP? Is there HARP originations in that $7 billion number?

Yes, absolutely.

Yes. We had about $1.4 billion. It was about 22% of our second quarter volume. Paul J. Miller - FBR Capital Markets & Co., Research Division: And with that, is the HARP -- with higher rates, is the HARP gain on sale margins relative to the overall gain on sale margins? Are they coming in or are they still holding pretty strong?

They've come in significantly. In the second quarter, they were still probably 100 basis points or so wider than non-HARP. We're expecting that, that differential will continue to shrink as we go forward.

The next question comes from the line of Ken Usdin of Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: First question, I just wanted to ask you to update us on your strategy around hedging the MSR. You guys have had really nice MSR gains over the last couple of quarters, and I know you did say that they would be down from here. But can you just talk as how, to the extent that you are hedging the MSR, or are you more just apt to kind of let it ride with rates at this point?

We absolutely hedge our MSR. Our risk management approach and sort of the underlying policy and limits require us to manage MSR volatility within fairly prudent guidelines. Now having said that, the same risk management approach, in general, applies to the overall mortgage banking revenues. And as you know, up until the end of the second quarter, we've operated under very unprecedented rate and margin environment. And during the second half of 2012 and most of the first half of 2013, primary 30-year mortgage rates have fluctuated between 3.5 and 3 7/8, and gain on sale margins at that time approached 4 or 5 points. Now operating in that environment for 3 full quarters in a row creates significant risk exposures in the underlying revenue streams, and we're cognizant of that. Now at that point, a 25 basis point move up or down in rates has created significant changes. We spend a lot of time studying our MSR asset and its convexity, and we use a lot of third-party opinions along those lines. We're also very cognizant on how MSR assets are valued. As you know, largely valuations depend on what happens at the end of the quarter. So it's very difficult for us not to hedge the position. And it's not -- the hedge position is not a position that you put on at the beginning of the quarter and go away because it's a very dynamic position. Having said all of that, I mean, having said all of that, we are now in a different rate environment. We moved away from that 3.5% to 3.75% zone into more of a 4.5% mortgage rate zone. And in this environment, clearly, our approach to hedging MSR values is going to be different than the strategies that we have used over…

We plan to follow our CCAR plan and issuing another $450 million in preferred securities is in that plan, so we plan to execute that strategy. Going forward, I think, we believe that we achieve better capital efficiency by utilizing preferred securities in our capital accounts. And over time, we would like to utilize the room that we have in that line item. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. And then just last quick thing. So that $450 million is going to -- well, we don't know exact timing, but that's something that we need to contemplate as far as the preferred expense run rate, the preferred dividend run rate as well.

Correct.

Your next question comes from the line of Steve Scinicariello of UBS.

Just want to talk about life after mortgage for a second here. Just given some of the strong underlying trends and some of the -- your other fee income areas like deposit charges, card, corporate, investment, management, what not. Just kind of wondering if you could talk a little bit about some of the opportunities you have to kind of ramp those up as kind of the economy continues to get better and the ability of that to maybe offset some of the kind of net effect from kind of the mortgage tailing off.

Yes. Steve, a couple of things I'd say. One is, if you look at it, I think we're a little bit ahead of the game because you can see the progress being made even today in today's results in our other fee areas. So whether you're talking about commercial fees, whether you're talking about deposit fees, whether you're talking about card fees, whether you're talking about record brokerage fees contributing to the IA -- our IA business, we feel really good about the momentum that we've built and investments we've made in those businesses that will continue. And I think that is true in terms of the guidance that we've given you and in the progress that we've made from that standpoint. And even in terms of life after mortgage, as you say, there will be a mortgage business that will continue to refer consumer product through. Our deposit products with cross-sells will continue to be a strength of ours. Our sales culture continues to be a strength. So those are opportunities. And we're also, really, just now beginning to see, I think, some better health in our business banking space. And so that end of the spectrum, I think, is beginning. And that has, I think, a better outlook over the next few quarters and into next year as well. So again, we feel like we're really well positioned, and our businesses are operating and working well. We think we're ahead of the game in terms of some of the product offerings that we've put out. We've talked about our deposit simplification, that's complete now. And we have a platform that we can build on. And as I mentioned earlier in one of the questions, we're also beginning to see a lessening of drag on our assets and balances in our -- in the CRE space. So again, we think that we'll show you and we'll be able to demonstrate the transition to the core bank strength that Fifth Third, I think, shows in the numbers today that you'll look for us in the future. I don't know, Dan, if there's anything you'd add.

No. That says it pretty well.

Your final question comes from the line of Jack Micenko of SIG.

On the mortgage side, you've grown your mortgage portfolio nicely over the past several years. At the same time, historically, when rates have gone up, we've seen a migration on the purchase side from 30-year fixed into maybe some 7/1s, 10/1s. I think that's generally the kind of product you've been looking to put on balance sheet. So I guess the question is, in the mortgage business on the purchase side, have you seen that transition yet in terms of a migration to lower -- shorter duration purchase mortgage? And would that potentially be a driver of additional mortgage growth in the future on balance sheet as the structure is more sort of consistent with the duration you're looking for in the mortgage book?

I don't have the statistics as to what percentage of our ARM originations are purchase versus refi. But in general, our preference, as you stated, is for shorter duration mortgage assets. We do not currently, and for a number of quarters now, have not been retaining longer-term mortgages whether it's conforming jumbos or our retail mortgage product. If we do see an uptick in shorter duration mortgage originations, yes, that would benefit our overall mortgage portfolio growth because I suspect that we will not make any changes in terms of duration preferences in our retained mortgage portfolios. Yes, if we do see that uptick, we may be able to retain a little bit more of those shorter duration mortgages.

Okay, great. And then on the commercial real estate side, the run off has been, I don't know, net, maybe call it $300 million a quarter. Can you give us some granularity around what some of the growth looks like and try to do the math and net out what -- when we see the trough, I think you'd said, maybe by the end of the year? And then what kind of sort of net new growth we could potentially forecast going forward?

Yes. I think the color that we've given you is really kind of pertaining to this year. And our expectation is that we could begin to see some growth in the CRE assets, so that gives you the number there. We really haven't given guidance in terms of -- next year we will when we get closer to the end of the year. But obviously, when we hit that inflection point, that could become -- as you can see, as a percentage of our total assets and book, we're probably one of the lowest, if not the lowest, in all of the regionals with that asset classification. So there's a good opportunity out there. We've got good focus and strong infrastructure against that to take a look at it. But we'll give you more clarity as we get further out in the year on that. So...

There are no further questions at this time. This concludes today's conference call. You may now disconnect.