SunTrust Banks Inc STI
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/19/2013

Operator: Welcome to the SunTrust Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode during the question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to turn today's meeting over to Kris Dickson, Director of Investor Relations. Thank you. You may begin.

Kris Dickson - Corporate IR Manager: Thanks Caroline and good morning everyone. Welcome to SunTrust's second quarter earnings conference call. Thanks for joining us. In addition to the press release, we've also provided a presentation that covers the topics we plan to address during our call today. The press release, presentation, and detailed financial schedules are available on our website, This information can be accessed by going to the Investor Relations section of the website.

With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; Aleem Gillani, our Chief Financial Officer; and Tom Freeman, our Chief Risk Officer.

Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures in talking about the Company's performance. You can find a reconciliation of these measures to GAAP financial measures, in our press release and on our website at

Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website.

With that I'll now turn things over to Bill.

William H. Rogers, Jr. - President and CEO: Okay. Thanks, Kris. I'm going to start this morning's call with a quick overview of the quarter and then we'll pass on to Aleem to provide details on the results and then going to come back and wrap up the call with some highlights from our business segment perspective. Well, you'll see we generated continued positive momentum in our consumer and wholesale businesses, but faced some headwinds in mortgage. Earnings per share for the quarter were $0.68 and net income grew to $365 million. Ongoing credit improvement, coupled with continued expense discipline, drove the earnings growth, up 36% over last year.

On a sequential quarter basis, both net interest and noninterest income were down modestly. The net interest income decline was from the expected decrease in our commercial loan swap income. The decline in noninterest income was driven by lower mortgage-related income. However, this was almost entirely offset by broad-based growth in other noninterest income categories, most notably, investment banking income and wealth management-related fees. Our intensive and ongoing efforts to drive efficiency improvements produced a 10% reduction in noninterest expense from last year.

Core operating expenses continued to be well controlled this quarter, though the more volatile cyclical costs increased. This increase was something we expected coming off of low first quarter levels, though its magnitude was higher than I care to say. Overall, we saw a 2% sequential quarter increase in total expenses, and an increase in our efficiency ratio. We still anticipate that these cyclical expenses will continue to trend down, and our focus on achieving our efficiency ratio objectives remains high.

Average performing loans were up about $600 million during the quarter, and the ongoing portfolio diversification efforts continued, with targeted growth in both C&I and commercial real estate loans. The credit quality story continues to be a good one, with nonperforming loans and net charge-offs hitting their lowest levels in over five years. Nonperforming loans declined by over 50% from last year, and this quarter's net charge-off ratio improved to 59 basis points.

Lastly, our capital position continued to improve, with our Tier 1 common ratio reaching new all-time high at an estimated 10.15%. Consistent with our CCAR announcement, we increased our quarterly common stock dividend from $0.05 to $0.10 per share during the quarter and we also commenced our share repurchase program, buying back $50 million of our common stock during the quarter.

Overall, for the quarter, we demonstrated progress in our strategic initiatives to grow and diversify our business and our financial results continue to trend favorably. While we see solid pipelines and much improved loan production, our loan balance growth isn't quite yet what we'd like, and near-term mortgage revenue is likely to slow. However, the improving operating environment and southeastern economy, coupled with our enhanced focus and execution, I believe bode well for SunTrust future opportunities.

And with that, let me turn it over to Aleem to walk you through the quarter in more detail.

Aleem Gillani - CFO: Thanks, Bill. Good morning, everybody. Thank you for joining us this morning. I'll begin my comments today with summary observations on this quarter's key earnings drivers and then, we'll delve deeper on subsequent slides.

Our profitability growth continued this quarter with earnings per share of $0.68, which was $0.05 more than last quarter and $0.18 higher than last year. The sequential quarter increase was due to the ongoing improvement in credit quality, which resulted in a lower provision for loan losses and this more than offset the modest revenue decline and expense increase.

Relative to last year, the 36% increase in earnings per share was due to a lower provision for credit losses and a 10% decline in non-interest expense. The latter of which was a result of our efficiency improvements and the abatement of cyclically high costs. Lower net interest income, due to the impact of the interest rate environment as well as declines in mortgage and trading revenue, were partial offsets. We'll review all of the underlying trends in more detail starting on Slide 5.

Net interest income declined sequentially by $9 million. This was driven entirely by the $14 million reduction in commercial loan swap income, partially offset by an additional business day in the current quarter and modestly higher average earning assets. Consistent with our prior guidance, the net interest margin declined 8 basis points.

The NIM compression resulted from the commercial loan swap income decline, as well as the ongoing compression in earning asset yields due to the low-rate environment. A modest reduction in deposit rates paid was a partial offset.

Relative to the prior year, net interest income was $64 million lower and the net interest margin declined 14 basis points. The primary drivers of both were lower asset yields, a reduction in commercial loan swap income and the elimination of The Coca-Cola Company dividend. These factors were partially offset by favorable shifts in the deposit mix, lower deposit rates and the benefits from an over $3 billion reduction in our long-term debt.

The steepening in the yield curve over the course of the quarter obviously is topical. So before we move on, let's spend a minute there. As you're all aware, a steeper curve is beneficial to spread income for the banking industry.

Of course, higher short-term rates in conjunction with a steeper curve will be even better, but we have to start somewhere. Before touching on the positives of the steeper curve, let me first acknowledge a couple of the negatives, both of which we'll discuss more on subsequent slides.

Higher rates are likely to lead to less mortgage refinance activity, as well as a decline in accumulated other comprehensive income. And we saw both of those occur this quarter.

That said, I don't think many of us expected the refi boom to last too much longer, and while the mark-to-market value of our investment portfolio was lower today, the value of the entire balance sheet, most notably deposits, which obviously are not mark-to-market, is considerably more.

If rates stay at their current levels, it will take a little time before the positive benefits of the steeper curve evidence themselves in the earnings string. For example, as existing investment securities and mortgages provide cash flow over the coming quarters, we'll reap the benefit by redeploying the proceeds at higher yields. We're also staying agile and trying to be opportunistic in managing through the rate environment. Specifically, during the second quarter, we issued 10-year debt early in the quarter when rates were low and locked in a very attractive coupon. Late in the quarter, after rates increased, we added some received fixed pay floating commercial loan swaps and we expect this to aid net interest income in the near term to the tune of about $8 million per quarter.

All told, as we look toward the coming quarters and assuming current rates hold, we expect the steeper yield curve to help mitigate the declining trend in net interest margin, as well as to provide an increasing benefit to net interest income over time. With respect to our NIM outlook, specifically for the back half of this year, we anticipate a mid-single digit basis point decline in the third quarter, followed by a more stable margin in Q4.

Moving on to Slide 6. Noninterest income declined modestly from the prior quarter, primarily due to lower mortgage-related revenue, which was largely offset by broad-based increases in other categories. I'll focus first on mortgage production income, which was $133 million for the quarter and down $26 million sequentially. The origination fee component of this income stream was about $60 million and stable to the prior quarter as closed loan volume was similar to the strong levels in Q1. However, gain on sale revenue, which you'll recall we book at rate lock, declined due to the significant increase in mortgage rates.

Mortgage servicing income was $1 million for the quarter, down $37 million sequentially and well below recent quarters. A lower net hedge gain was the driver as rates were volatile during the quarter and the net hedge performance was essentially breakeven versus being a positive contributor to servicing income in recent quarters. While mortgage revenue was down, other fee income streams rebounded nicely from first quarter levels.

Most notable was investment banking income, which was $93 million for the quarter and up $25 million sequentially, driven by increased syndicated finance and high-yield bond fees. Wealth management-related revenue also increased, with trust income and retail investment income up a combined $14 million due to improved market conditions and managed account growth.

Looking year-over-year, noninterest income declined $82 million. Mortgage servicing income fell $69 million, driven by lower net hedge outperformance, as well as from declines in the value of the MSR due to the higher collection of cash flows, which is a result of the increase in refinance volume.

I will note that we provided a summary schedule in the appendix, which gives you some additional clarity on the moving pieces within servicing income. In general, MSR net hedge income depends upon the rate environment. With periods of low interest rate volatility, such as we experienced over most of last year, more likely to produce favorable results than during a more volatile period such as this quarter.

As it relates to the decay, one partial benefit from a slowing refi market is that decay is expected to trend lower as refinance volume declines. Trading income also declined on a year-over-year basis as the increase in rates during the current quarter yielded lower fixed income trading results. On the flip side, investment banking income was higher by almost 25% and mortgage production increased as the decline in the repurchase provision more than offset lower gain on sale revenue.

Touching briefly on mortgage repurchases, we continued to have an increased pace of resolution activity this quarter on the part of both SunTrust and the GSEs. You're probably aware that the FHFA has a published objective of completing rep and warranty demands on pre-conservatorship loan activity during 2013.

Likewise, SunTrust is equally interested in working through the demands as quickly as possible. This increased pace of resolution evidenced itself in the second quarter by a lower pending population and higher charge-offs, as well as increased profile requests. Meanwhile, repurchase demands fell relative to first quarter levels.

Let's move on to expenses on Slide 7. You'll recall that last quarter we had an over $70 million or 50% sequential quarter decline in our credit-related expenses and operating losses, falling to levels that were below our normalized projections. As expected, these cyclical costs increased this quarter, although as Bill noted, more than we would have liked, and drove the $34 million or 2% increase in total non-interest expenses. This increase was due entirely to a specific legal accrual recorded in the operating loss line item. Over the past several years, we and other banks have received various claims made by government agencies, primarily around our pre-crisis mortgage origination and servicing activities. No matter this quarter is also mortgage related and while it is not fully resolved based on the information we have at hand, we believe that prudent to make an accrual this quarter for the estimated cost of resolution.

Collections expense also rose primarily due to an accelerated pace of default resolution, partially offsetting these increases were lower core operating costs, including reductions in employee benefits expense due to seasonality. Looking at year-over-year trends, our efficiency improvement is evident in the $149 million or 10% non-interest expense decline. Roughly half of this was due to lower core operating costs, including compensation, legal and consulting and the balance was due to the abatement of cyclical expenses. Year-to-date, our expenses were down over $300 million and prudent expense management remains an area of focus for Bill and our entire management team.

As you can see on Slide 8, while our efficiency ratio improved year-over-year it went the wrong direction sequentially, due to the cyclical cost increase and the modest revenue decline. While this is my least favorite slide, this quarter we promised you and our SunTrust teammate's transparency around this issue. We remain committed to achieving an approximate 65% efficiency ratio in 2013 and to our long-term target of below 60%.

Turning to credit quality; the notable improvement in our asset quality trends continued this quarter. Net charge-offs, which were at their lowest level since the fourth quarter of 2007, declined by about 50% from last year and 20% sequentially, driven by the residential portfolio. The improving housing market certainly contributed as we're benefiting from fewer delinquencies, lower loss severities and higher prices upon disposition of foreclosed assets.

Concurrent with lower net charge-offs, the provision expense has declined, while the allowance for loan and lease losses has also come down, albeit at a slower pace in recent quarters, as the allowance ratio has reached a lower absolute level. Similar to net charge-offs, nonperforming loans also declined about 50% from last year and 20% sequentially.

Every loan category improved, most notably, residential loans. Contributing to the sequential quarter decline was the return of about $220 million in Chapter 7 bankruptcy loans to accruing status. You will recall that in the fourth quarter of last year, we reclassified about $230 million of residential loans previously discharged from Chapter 7 bankruptcy to nonperforming. While the preponderance of these loans had been current on their payments for some time, the reclassification to nonaccruing status was made to be consistent with regulatory guidance around this topic. Because these loans have now remained current for six months since the time they were moved to NPL, the $220 million was reclassified back into performing loans this quarter. This reclassification had no impact on our second quarter net charge-offs or loan loss provision. And these Chapter 7 related loans will remain classified as accruing TDRs.

Lastly, on this topic, I'll point out that even excluding the impact of this reclassification, non-performing loans declined by 7% sequentially. As we look to next quarter, we anticipate that non-performing loans will continue to trend lower and for net charge-offs to be relatively stable to their second quarter level. Consistent with our comments in recent quarters, we continue to expect future credit quality improvement to be led by residential loans as commercial and consumer category credit metrics already approximate normalized levels.

Turning to balance sheet trends on Slide 10. Average performing loans increased sequentially by $600 million or about 0.5 percentage point. C&I was the largest contributor and commercial real estate was also up. Bill will give you a little more color on both of these when he discusses our wholesale segment results. Most other loan categories were relatively stable to the prior quarter, with the exception of continued pay downs in our government guaranteed mortgage portfolio. Relative to the prior year, performing loans were down modestly.

Guaranteed student loans and guaranteed mortgages declined a combined $4 billion, primarily due to the loan sales we executed late in 2012. Offsetting this, we had organic growth in C&I of $3.7 billion or 7%. Additionally, consumer loans, excluding guaranteed student loans, were up $1.1 billion or about 9%. Overall, loan growth remains moderate, though we continue to see some potential precursors to it improving, most notably in commercial loan pipelines that remained at healthy levels during the quarter, and gradual improvement in consumer and business confidence.

Turning now to deposits. Average client deposits declined by about $1 billion this quarter, as growth in DDA was more than offset by seasonal reductions in commercial client tax accounts, as well as ongoing declines in time deposits. Relative to the prior year, deposits were up 1%, though the underlying favorable shift in the deposit mix was the more notable story. Lower cost deposits were up almost $4 billion, with DDA the largest contributor, growing by over $2 billion or 6%. Concurrently, higher cost time deposits were managed down by $3 billion or 17%. This favorable shift in deposit mix helped drive the approximately 20 basis points or $43 million year-over-year reduction in interest-bearing deposit costs.

Slide 12 provides information on our capital metrics. Tier 1 common capital again expanded, this time, by approximately $300 million, and the Tier 1 common ratio was an estimated 10.15%. Based upon our current interpretation of the final Basel III capital rules issued on July 2, we estimate our Basel III Tier 1 common ratio to be approximately 9.5%.

As shown at the bottom of the page, the tangible common equity ratio and our tangible book value per share both declined modestly, which was due to lower unrealized gains on our securities portfolio from the increase in interest rates during the quarter. This was largely offset by higher retained earnings. As Bill noted earlier, we commenced our share repurchase program this quarter buying back $50 million of our common stock. For the capital plan we submitted in conjunction with the CCAR process, we have the capacity and the intent to repurchase up to another $150 million through the first quarter of 2014.

With that, I'll now turn things back over to Bill to cover our business segment performance.

William H. Rogers, Jr. - President and CEO: Okay, Thanks, Aleem and I'll move to Slide 13. Taking a look at our business from a segment basis revealed several favorable operating trends and our consumer and private wealth management businesses net income is up 21% over the last year result of continued credit quality improvement and a 9% reduction in non-interest expenses due to changes in our staffing model and our branch network. We steadily improved the efficiency ratio in this business driving it down over 200 basis points from last year to 65.4%. And we obviously – we need to continue to focus here but we had good momentum behind us. Our loan balances were down from last year due to the fourth quarter student loan sales, consumer's willingness to borrow seems to be improving. We continue to see strong production across our consumer lending products with production volume up 16%. Overall, deposits were down 1%, but DDA continue to increase in consumer time deposits were down 17% marking another quarter of favorable mix trends.

Now let's take a closer look at our wholesale business this quarter. Our wholesale business had its second highest net income quarter ever and grew 37% over last year. Ongoing improvement in credit quality drove the substantial decrease in the provision for credit losses, as well as a reduction in OREO expenses. A 10% expense decline from last year, as well as higher net interest income, helped drive down the efficiency ratio over 650 basis points to 52%. The segment had solid loan growth as we continued to grow C&I. Growth was driven by our not-for-profit and government industry vertical and dealer businesses, along with our large corporate lending areas, most notably, asset securitization, our energy vertical and asset-based lending.

As you're aware, wholesale is an important business for us. We've had a lot of success already in our strategic initiatives to grow its business, and much of that continued this quarter. Corporate investment banking turned another strong quarter with near-record net income. Our efforts to develop lead relationships have resulted in a 20% increase from January of last year and more than double what they were at the beginning of 2010. We're also gaining momentum on our efforts to grow targeted new business in commercial real estate. After reaching an inflection point in the first quarter, CRE was again profitable with further sequential growth and loan balances and marked production increases over last year. We continue to develop our pipeline and believe we'll be successful in our efforts to drive further growth here.

Now, let's take a look at mortgage. As you heard in some of Aleem's comments, our mortgage business was challenged this quarter. Continued credit quality improvement helped shrink the overall net loss from last year. However, lower servicing and gain on sale revenue has increased and – as well as increased cyclical cost drove a larger sequential quarter net loss. This quarter's closed production volume was $9 billion, which was the highest level since the third quarter of 2009. That said, as you're aware, the state of affairs in the mortgage business changed a lot in the latter part of the quarter due to the increase in rates. And we do expect refi volume to begin abating during the second half of the year.

Purchase volume, on the other hand, continues to gain momentum, though obviously, not nearly enough to offset the expected refi decline. While overall volume in our mortgage segment is expected to decline, let me provide a little perspective here.

Noninterest income on our mortgage segment was about $130 million this quarter, which equated to 6% of SunTrust's total revenue. And while mortgage fee income declined by about $65 million sequentially, our business mix diversity helped mitigate this as our total revenue was relatively stable. Furthermore, ongoing credit quality improvement, which also happens to be primarily mortgage-related, helped drive earnings growth this quarter.

So, in summary, considerable opportunity continues to remain across our markets. We have targeted strategies to address these opportunities and are seeing meaningful progress towards our goal. We remain focused on our priorities to grow profitably and improve our efficiency.

With that said, Kris, let me turn it back over to you, and we can start taking some questions.

Kris Dickson - Corporate IR Manager: Thanks, Bill. Caroline, we're ready to begin the Q&A portion of the call. I'd like to ask the participants to please limit yourself to one primary question and one follow-up so that we may accommodate as many of you as possible today.

Transcript Call Date 07/19/2013

Operator: Paul Miller, FBR.

Paul Miller - FBR Capital Markets: Real quick housekeeping question. On your income statement where it says mortgage banking $133 million, is that net of the provision?

William H. Rogers, Jr. - President and CEO: The repurchase provision for the quarter, Paul?

Paul Miller - FBR Capital Markets: Yeah.

William H. Rogers, Jr. - President and CEO: Yes, it is. Yeah.

Paul Miller - FBR Capital Markets: So that $133 million is net, so if that provision wasn't there, it would be even closer to $200 million?

William H. Rogers, Jr. - President and CEO: Yeah, the provision for the quarter – the repurchase provision for the quarter was $15 million.

Paul Miller - FBR Capital Markets: $15 million, I'm sorry, yeah. So it would be closer to, what, $133 million plus $15 million?

William H. Rogers, Jr. - President and CEO: Exactly.

Paul Miller - FBR Capital Markets: Then can you add some more color on your purchase volumes? Like, are you guys increasing that dynamic by going after that product, or is it just coming in the door? Because I know we've seen purchase volume up pretty strong across the space.

William H. Rogers, Jr. - President and CEO: Yeah, we've always been a good purchase mortgage business. And you certainly saw that mix, substantially, in the latter part of the quarter. Our closed purchase volume in June was 40% of our business. Of course, it was down overall, but it was 40% of our business. Our absent purchases are up fairly substantially. If you look at us and think about some of the markets that we operate in and some of the recovery in those markets, we're pretty bullish on what we see on the purchase side. Now that being said, and I said in my comments, that's not enough to offset refi.

Paul Miller - FBR Capital Markets: Then one last question is, what percentage of your stuff is HARP loans? Do you guys know that?

William H. Rogers, Jr. - President and CEO: In the quarter, about 20% of our refi was HARP. What you'll see is, applications of HARP are down, down fairly substantially, which wouldn't be a surprise.

Operator: Erika Penala, Bank of America Merrill Lynch.

Erika Penala - Bank of America/Merrill Lynch: Aleem, I just wanted to ask you a question about the comments you made on your MSR hedging. I guess, and I apologize if this seems like a silly question, but I always thought that when long rates went up, then we could expect more hedge gains as you revalue your portfolio higher. But you mentioned on the call or during your prepared remarks that it would continue to go down, but decay less. Am I misunderstanding that?

Aleem Gillani - CFO: Yeah, Erika, yeah, a little bit. The decay is a reduction to income. If you take a look at the deck, in the back of the new slide that we put in to try and help you. If you take a look at Page 27 in the appendix, and you'll see a line there called decay; and that's a reduction to servicing income. As refi's decline, that decay ought to reduce. That's the point I was trying to make. So, that ought to help servicing income over time.

Erika Penala - Bank of America/Merrill Lynch: My follow-up question is on your gain on sale margin. Could you help us think about, as we forecast out, how we should think about your purchase gain on sale, your non-HARP refi gain on sale and your HARP gain on sale?

Aleem Gillani - CFO: Well, the gain on sale in general across those, is relatively similar in terms of margins. We don't have a higher – we don't charge a higher rate for HARP, for example, versus other loans in general. Where we get a slightly higher gain on HARP is because we put most HARP loans in through our least expensive channel, Consumer Direct. So the lower expense for HARP loans leads to a, sort of, slightly higher gain on those loans. I don't know if that gets to the point of your question, but in general, if you look at our margins across the board, they're not that much higher in terms of rates charged for HARP relative to other loans.

Erika Penala - Bank of America/Merrill Lynch: So just to right – make sure I understand, and I'll get back in the queue, the mix shift shouldn't have an impact on your gain on sale margin going forward.

Aleem Gillani - CFO: It may have a little bit as, if HARP declines and therefore, we have less HARP to put through our least expensive channel, that might have a slight negative impact on our overall gain on sale.

William H. Rogers, Jr. - President and CEO: Well, Erika, let me also come back to a point I think you asked on your first question on MSR, on the hedging activity. We hedge our MSR out every day, not just every quarter, but every day. And so the volatility in MSR is a volatility that we're generally not willing to take on a day-to-day and quarter-to-quarter basis because we treat those at fair value. So if you think about MSR a little bit like a trading asset, that's volatility we're not willing to absorb. So we hedge that out. If you, again, take a look at Page 27, what you'll see is that the write-up in MSR this quarter was almost perfectly offset by the hedge. The hedge worked really well, and if that's getting to your point about you were expecting to see a big gain from MSR, that did, in fact, occur. The asset did go up, but the hedge worked very well to offset that.

Operator: Ken Usdin, Jefferies.

Ken Usdin - Jefferies: Just questions on expenses, there is a bunch of moving parts obviously, and I just wanted to understand a couple of things. First of all, can you give us an update on you had previously said something about environmental moving back towards 3.25 plus or minus $50 million. And obviously we are back up this quarter as expected to about a 500 run rate. So can you just give us an understanding of, do you expect to trend back down towards $325 million plus or minus $50 million? Or from what you see, could we get distinctly better than that at some point?

Aleem Gillani - CFO: Well, I think, this quarter, we did have a tick back up for a couple of reasons, Ken. Some of that was a little bit than we expected. And I think last quarter, we guided to a slight increase back up, just because of the big step down we had in Q1. And the Q1 number would have taken us to sort of well below that $325 million if you had annualized that. But if you look at, if you remove the one item, the mortgage-related legal accrual item, which goes into that -- and you can see some detail on this on Page 29 of our appendix. If you remove that one item, then, if you annualize the first half of the year, we're actually in line with that normalized level of $325 million plus or minus.

Ken Usdin - Jefferies: Well, exactly. And so if you're already there, I would presume that there's still a very good amount to go from here or is there any reason why that wouldn't continue to improve meaningfully?

Aleem Gillani - CFO: Well, I would hope it would decline some. But a portion of that, if you look, again, at Page 29, a portion of that is credit services. And that portion is actually what we pay every quarter anyway just the ongoing cost of putting new loans on the books. So that portion is not going to change very much. OREO, if you take a look at OREO costs, you've seen in the first half of the year, our OREO costs are a total of $1 million and that's not really going to be sustainable in the long term. You would expect that to come up a little bit. So while the other 2 components of our cyclical costs ought to come down some, there will be some upward pressure from OREO. In general, I would expect this to trend down a little bit, but I think that $325 million plus or minus is actually our attempt to give you some pretty good guidance.

William H. Rogers, Jr. - President and CEO: Yeah, and remember, sort of pre-crisis, this number was sort of in the $200 million or $250 million kind of range, and it got up to about the $700 million range. So the $325 million was an attempt to try to figure out – the $325 million plus or minus as you defined it, was try to sort of figure out what's the new normal. I don't think the new normal will be pre-crisis. But clearly, we're trending down and I think the way Aleem described it, sort of, more annualized in the first half, seems to be that we're tracking towards what we talked about.

Ken Usdin - Jefferies: And then, my second question is just about the mortgage business. You guys are doing a really good job on the comp and benefits side adjusting. I'm just wondering, how much have you already adjusted with your mortgage capacity versus how much you could – you still have to adjust relative to the ongoing changes in the origination environment. So, again, kind of what's already been adjusted to versus how much can you adjust further?

William H. Rogers, Jr. - President and CEO: Yeah, let me take a crack at that. As you mentioned, there is about 20% of the variable cost which are in the categories you primarily talked about, which are compensation and then just sort of when you think about sort of normal kind of cost of appraisals, and those things that are just highly variable to activity. Now they do lag a little bit because of the lock and close. We booked a gain at – we booked a gain at lock and we pay the comp at close, so it's got a little bit of lag. But the 20% sort of happens. I mean, that's part of the system. We made a conscious decision as we were building up and seeing what we had in the refi side, as we built up this time, we took about 25% to 30% of our cost and essentially, let's call it, outsourced it for lack of a better word, and we created more variability. So that cost, in the past, would have been more fixed cost on our books. It's now more of a variable cost. So several weeks ago, literally the day, I think when we started to see what was going on with rates, we started putting contingency plans in place to not only get those variable costs down, some of the fixed costs we converted to variable and then, putting plans in place to figure out what the actual fixed cost as well, have to come down, and those plans are already in place. We've already punched the button. If I were trying to summarize sort of how to think about it, if you think about sort of the new mortgage take sort of the legacy out, at the higher gain on sale, we were originating the mortgage at about a 50% efficiency ratio, to sort of think about that at a high level. Now, with sort of the changes and trying with the lag and everything else, our goal will be, and I'm fairly confident we can see a path to this, we'll continue to originate mortgages in a way that is accretive to our current efficiency ratio. Maybe, does that help?

Ken Usdin - Jefferies: Yeah. I guess, if you'd wrap it all together just on the expense comments – can expenses continue to come down from here, just on absolute terms?

William H. Rogers, Jr. - President and CEO: Total expenses or mortgage related?

Ken Usdin - Jefferies: Total?

William H. Rogers, Jr. - President and CEO: Yeah, total. So, we were operating sort of at a total expense level, sort of, at $1.5 billion kind of handle to it. It now has a $1.3 billion handle to it, and that feels a lot better. So, I have no intention of us going backwards from that standpoint, and we've committed to the efficiency ratio of 65%. And long-term, we've committed to efficiency ratio of 60%. So, some combination of revenue and expense. Relativity is going to get us to that 60% efficiency ratio. So if we stay in this low-revenue environment, we're going to lower our expenses. Hopefully, with the initiatives that we've seen, changes in the rates, increase in NII, we'll be able to have some revenue component to add as well.

Aleem Gillani - CFO: Ken, when you're thinking about what our expenses were last year or the year before, we were running at $6.2 billion in annualized expenses. If you look at where we've come in this year, we're running about $5.6 billion in annualized expenses. So we've taken $600 million of expenses out of the system so far, but we haven't stopped. There are going to be other opportunities. We're looking at other things. The focus of this management team remains intense.

William H. Rogers, Jr. - President and CEO: And also, that's sort of a natural. As expenses are coming down, they get annualized and actualized. So, as they come down, they tend to have a natural momentum.

Operator: Ryan Nash, Goldman Sachs.

Ryan Nash - Goldman Sachs: Just, first, maybe a question on the margin. Given the fact that the swap roll-off is no longer a headwind for the next couple of quarters, and Aleem, you mentioned reinvestment yields are improving, I understand that we're going to be down a couple of basis points next quarter and then we should stabilize for 4Q. Can you just help us understand what the path maybe beyond 4Q? Has the rate environment improved enough such that reinvestment yields are greater and we can now see some more stability to the margin? And I have a follow-up.

William H. Rogers, Jr. - President and CEO: Well, that's sort of a tough question, Ryan.

Aleem Gillani - CFO: There's a little bit of a crystal ball in here. I think the rate move that we saw was certainly nice and the industry certainly needed it. So, thank you Mr. Bernanke. However, what the industry really needs is a move up in short-term rates to take us back to the profitability levels that we enjoyed before the crisis and while this is great and this will certainly help mitigate the overall decline in margin for the industry and for SunTrust. All this is, is a steep, somewhat steepening of the curve. We're certainly not back to normalized rate levels and when you think about where the industry's net exposure is along the curve it's generally much shorter as an industry then 10 years. So this is going to help somewhat it's not going to be what we need to take us back to a much higher net interest margin levels.

Ryan Nash - Goldman Sachs: Then Aleem, if I could just add one follow-up related to the swaps, I think the release mentioned that you did some swaps in the quarter. Can you just remind us what the duration of the swap book is and I think also according to 10-Q, it says when rates rise I think 200 basis points, we should see NII rise 5.3%. Does that number take into account the impact of swaps rolling off and if not, what would your asset sensitivity look like without that?

Aleem Gillani - CFO: Well, our asset sensitivity let me start with our asset sensitivity at the end of the second quarter is currently 1.3%, and that's based on a 100 basis point parallel shift. So that's an instantaneous 100 basis points parallel shift and how much our NII will go up as a result. The swap book duration at the end of the second quarter is 2.5 years and the way the balance sheet is structured, we become more asset-sensitive every month, naturally, unless we do anything. So unless we take action, we're structured to become more asset-sensitive every month. As the swaps roll off over the course of the next 2.5 years, and some of them obviously are before that, you'll see us becoming more asset-sensitive over time.

Operator: Gerard Cassidy, RBC.

Gerard Cassidy - RBC Capital Markets: I may have missed it, but can you give us some color – your Tier 1 common ratio under Basel III increased very nicely in the quarter, and we saw that the risk weighted asset number fell, which was a driving factor. What drove the risk-weighted assets down?

Aleem Gillani - CFO: Under the Basel III calculation, Gerard?

Gerard Cassidy - RBC Capital Markets: That's correct.

Aleem Gillani - CFO: The new rules have changed pretty substantially from the previous proposal. The effect of the new rules is for some that there were – in the previous proposal, there were multiple tiers of risk weightings for mortgages, including 1 tier that was up to 200%. The new rules basically put all mortgages into two tiers, 50% and 100%. As a result, doing sort of normal mortgages for normal clients doesn't require us to put up additional capital for regular mortgages, as well as, for home equity; and that's a big benefit for our portfolio. We also received additional benefits for our CRE exposure. I think what you ought to see is, across the industry you ought to see regional banks do better as a result of the new rules than money center banks. You ought to see regional banks do better than investment banks. And you ought to see banks that have mortgage exposures do better than banks that don't have mortgage exposures.

William H. Rogers, Jr. - President and CEO: Relatively.

Aleem Gillani - CFO: Relatively.

Gerard Cassidy - RBC Capital Markets: And the second question is coming back to the environmental cost, where you guys have indicated that around that $325 million is the new norm, down from $700 million, but up from, I think, you said $2.25 or $2.50. What's preventing the environmental cost from -- when we get to a normalized state and you can pick whenever that is, it may be a couple of years from now, but what prevents the environmental cost from actually getting back to the way they were pre-crisis?

Aleem Gillani - CFO: Well, I think one of the things that I'm concerned about in general is, as a country, as an industry, have we trained consumers that it's okay to not repay debt? And is there going to be a higher incidence of default over time in the future than there has been in the past? That is one of the things I'm concerned about, and that's one of the things that's holding me back from saying that we're going to get back to the world that we once had.

William H. Rogers, Jr. - President and CEO: And I think, if you also just – some of this, well, may also be our natural conservatism. So there may be some factor in there, but if you think about the cost of things. So think about the cost of collection and credit services under a different regulatory environment. And the requirements to meet different and more stringent standards, there's just some additional cost for that. Now how much that is, I don't think we also ought to know. That hasn't leveled out yet. But the only reason we say it's more than previous is there just really is embedded increased different cost of compliance that didn't exist before.

Aleem Gillani - CFO: Cost of service is likely to be higher, as Bill says...

William H. Rogers, Jr. - President and CEO: It's going to be.

Aleem Gillani - CFO: And there are likely to be higher set of repurchase demands from the GSE in the future than there have been in the past, and a longer duration. And now it also takes longer to resolve default and other issues than it used to. So Gerard, I think, directionally, you're right. But I'm not sure that we'll get back to that type of a number.

Operator: Brian Foran, Autonomous.

Brian Foran - Autonomous: I guess, given the payout ratio this year, I know it's early to talk about next year's CCAR, but just remind us, you will be accreting capital lapse and a big change in the balance sheet growth outlook. And maybe kind of looking at a 10%-ish Basel III ratio next year. How are you thinking about the priorities beyond organic growth, which I'm sure is the first priority both now and in the future?

Aleem Gillani - CFO: You're right. Organic growth is absolutely #1.

William H. Rogers, Jr. - President and CEO: You're also right, it's early to talk about CCAR.

Aleem Gillani - CFO: But if what you're asking, Brian, is a CCAR question...

Brian Foran - Autonomous: I guess, maybe I shouldn't have mentioned CCAR, just more the capital waterfall now that 6 months ago, we wouldn't have necessarily had you in the excess capital bucket. Now we've got you in a pretty big excess capital bucket, at least, on our numbers. And just remind us of what your waterfall is beyond that organic growth between dividends, buybacks, acquisitions all that kind of good stuff?

Aleem Gillani - CFO: Acquisitions aren't really making the list that's pretty low down. Organic growth is number one, meeting our clients' needs is always number one for SunTrust. Beyond that, to the extent that we'll be able to grow dividend and buyback and return capital to our shareholders, obviously, that's going to be high on our list. And by the way, we're delighted to be able to start to do that this quarter for the first time in six or seven years. So we're pretty happy about being on this side of the line. Never say never for acquisitions, I guess, but we've got so much opportunity, Brian, to run our company better and become more efficient, to focus on our clients and just do more business. That's really what we're focused on.

Brian Foran - Autonomous: And then, just maybe one follow-up on the swaps, not to overkill the issue. But what's the reasoning – so swaps versus MBS or swaps versus securities, I mean, the reasoning to add swaps, is it just more efficient from a balance sheet perspective? Or does that do other things for you as well?

Aleem Gillani - CFO: One of the things it does is that it's quick. I said earlier that we're opportunistic in the way we did this, and we were able to add $2 billion in swaps right at the end of the quarter very quickly as rates moved up. So these swaps are efficient from a transactional perspective, both going in and going out. So that's helpful. They don't also affect earnings in a one-time way on the outlook. We sell securities and take a gain, that gain shows up immediately and then, requires an adjustment by everybody. Whereas, if we exit swaps, the gain in the swap just accretes into income over the original life of the swap and so it doesn't require a lot of sort of extra adjustments. I guess, one other point is that there are really good hedges in the balance sheet for our commercial loans.

Operator: Marty Mosby, Guggenheim.

Marty Mosby - Guggenheim: Aleem, I wanted to walk through the mortgage banking segment income statement. You're showing a $76 million loss in the quarter, and what I was trying to do is think of, as you've talked about the production coming down, you've already kind of, like you said, you do it at lock so you've already got a lot of the gain on sale margin compression in there, but I think there's three other moving pieces that will, potentially, more than bring this to a breakeven. I think you've got the $72 million legal matter in this segment because that would be real estate-related. You've got the $28 million of incremental collection cost, and you also have suppressed servicing profitability as your, like you said, decay goes back to where it was. Even if you have your hedge about zero or breakeven your decay should improve by about $20 million, so in my mind, I'm just trying to map the $76 million to, at least a break even in the short run, and these three moving pieces seem to kind of get me there. I just wanted to see what you thought about that.

Aleem Gillani - CFO: Marty, I think you've got the direction right, but numbers, perhaps, not exactly right. That legal matter wasn't as high as the $76 million. We referenced the legal matter as being sort of the primary driver for our overall increase in expenses, which were up $34 million. So the legal matter, I would think about it in that context rather than the $76 million. The increase in operational expenses, credit expenses, was about $18 million. And I think you've mentioned a higher number just now. And over time, yes, I think directionally you're also right on servicing. And servicing income ought to also come back – will also come back over time as we start to get less volatility again and rates will help and (indiscernible) comes down. So, directionally, I think you're right on every one of those pieces. But the numbers you mentioned seemed a little high to me.

Marty Mosby - Guggenheim: And then just a follow-up on the servicing side. When you look at your net hedge performance, it's been favorable. And you mentioned the volatility being the driver of the negative that you saw going from – what's been a $30 million to $40 million net positive down to about breakeven. Are you using forward commitments and is that maybe why you end up with a little more the volatility matter than if you were using interest rate swaps, which don't typically be – aren't as related to the volatility in the marketplace? So I just was wondering, if we do see rates leveling back out, could even the net hedge performance improve from where it's at right now?

Aleem Gillani - CFO: Yeah, Marty, I would think about it this way. MSR, as an asset, are inherently negatively convex. So, within MSR, we're naturally short volatility. So, the hedging process requires that we buy volatility or offset that short volatility position. And it's cheaper to do that in any quarter when there is less volatility in the market. And that's been the case as we've seen for the last year or so, this quarter, obviously there was a lot of rate volatility in the market and so just the cost of buying back that short volatility position went up. If as you say we had backed to a more normal rate environment, it sort of doesn't really matter if it's going up or down as long as it's not volatile, the hedge ought start to perform the outperformance we've had in the hedge ought to starts to come back, yes.

Marty Mosby - Guggenheim: And just out of curiosity, the product you are using to get that complexity is a forward commitment what's the product you're using to hedge here?

Aleem Gillani - CFO: We've got some forwards, we've got futures, we've got swaps, we've got security then we have options.

Marty Mosby - Guggenheim: Would swaps be a smaller part of that --- I'm just trying to -- because typically the swaps don't have the complexity and don't relate to the volatility is what I am trying to get at.

Aleem Gillani - CFO: You are exactly right. When we use swaps, we're using that for a duration hedge not really a complexity hedge. And it's more options and forwards it will help us on the complexity side.

Operator: Matthew Burnell, Wells Fargo Securities.

Matthew Burnell - Wells Fargo Securities: Aleem, I just wanted to ask a question from page 25 of the supplement and the corporate and other page where you say -- where you lay out your interest income, interest rate sensitivity. It looks like it's down by a bit more than half from the first quarter numbers that you put on the same page. And I guess I am just curious if you can give a little color as to what's going on there and how you are thinking about how that might change over the course of the next 3 to 6 months?

Aleem Gillani - CFO: That doesn't matter. I think that's another crystal ball question. That depends on exactly what rates do. How steep the curve gets and whether short rates move at all. But in general, our asset sensitivity increases by – and I'm going to round here, but it's about one-tenth of 1% per month. So it will naturally go up unless we do something. What we did do in this quarter is we added some of those swaps. So the swaps that we added reduced our asset sensitivity some, but they also added $8 million a quarter to our interest income. On Page 24 of the deck, when you look at the new swap income forecast, you'll see that that's flattened out pretty considerably now right into the middle of next year. So we added some surety as we took advantage of the higher rates that we saw in the second quarter; and that did make us a little bit less asset-sensitive in the short term. But that asset sensitivity will come back while we've added NII.

Matthew Burnell - Wells Fargo Securities: Let me ask you a question about the non-mortgage lending business, if I can. Bill, you mentioned your increased level of confidence about commercial lending and potential loan growth in the second half of the year. Could you give us a little more color as to why you're feeling more confident about that? And are there any specific regions or products within C&I that are particularly fertile areas for loan growth?

William H. Rogers, Jr. - President and CEO: Yeah, and I don't want to get over my skis on confidence, but I want to talk about the things that we do see. If you sort of look at one of the bigger things that we look at, as I look at it, is our commercial pipeline. Our commercial pipeline was about equal to what it was at the end of the first quarter, but that's about 60% ahead of where it was at the end of 2012. So we're building a pipeline that's positive. In terms of the places where we've seen to-date, good activity, in the commercial side, our not-for-profit business has been really good. On the CIB side our energy business, I'm really happy to see things like that we've invested in, like asset-based lending, are starting to click in and provide some more activity. And then, related to the consumer side, production is up and we saw I don't maybe it's an inflection point, but we saw an inflection point on home equity that, that sort of finally stabilized. Remember, we have sort of been in a fully (trying) mode on home equity over the last quarter, that sort of has stabilized. And production in home equity is really, really good. So it's mainly production and pipeline kind of things that I see, and those are all offset against continued deleveraging and other activities. And then, the final is CRE. And albeit off a smaller base, it's about $5 billion base. I mean, similar there, we hit an inflection point already. So at the last quarter, we hit an inflection point. We're now starting to be in a growth mode. And production there in the – I guess, primarily, the institutional side has been good. From a region-by-region perspective, it's pretty evenly distributed, but we are seeing parts of our markets, take Florida, probably, as the largest example of the most recovery in the shortest period of time, which make us more optimistic as we see sort of state unemployment rates, again, particularly in areas that were way down, like Florida, which are now way up, and trending ahead of national numbers.

Matthew Burnell - Wells Fargo Securities: One of your competitors mentioned continued conservatism in the mid-market and small business sector. Is that consistent with what you're seeing as well?

William H. Rogers, Jr. - President and CEO: You mean, from the client perspective, continued conservatism?

Matthew Burnell - Wells Fargo Securities: Yes.

William H. Rogers, Jr. - President and CEO: I think that's accurate. They continue to have a lot of cash, while there's lots of dialogue and conversation. But I think conservatism in that group, as defined, is an accurate statement.

Kris Dickson - Corporate IR Manager: Thanks, everyone, for joining us today, and we appreciate it. If you have any further questions, certainly, feel free to give the IR department a call. Otherwise, have a great weekend.

Operator: That concludes today's conference call. Thank you for your participation. You may disconnect at this time.