Solidion Technology Inc.
Q4 2014 Earnings Call Transcript
Published:
- Executives:
- Ankur Vyas - Director, Investor Relations William H. Rogers - Chairman and Chief Executive Officer Aleem Gillani - Chief Financial Officer and Corporate Executive Vice President
- Analysts:
- Matt O’Connor - Deutsche Bank Ryan M. Nash - Goldman Sachs John Pancari - Evercore Partners Inc. Mike Mayo - CLSA Kenneth Usdin - Jefferies & Co. John E. McDonald - Sanford C. Bernstein & Co. Terry McEvoy - Sterne Agee & Leach Inc. Matthew Burnell - Wells Fargo Securities, LLC
- Operator:
- Welcome to the SunTrust Fourth Quarter Earnings Conference Call and thank you for standing by. At this time, all participant lines are in a listen-only mode until the question-and-answer portion of today’s conference. [Operator Instructions] Today’s conference call is being recorded. If you have any objections, please disconnect at this time. And now I’ll turn the call over to Ankur Vyas, Director of Investor Relations. Thank you, you may begin.
- Ankur Vyas:
- Thank you, Brad. Good morning, and welcome to SunTrust fourth quarter 2014 earnings conference call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; and Aleem Gillani, our Chief Financial 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 when talking about the Company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. 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 turn the call over to Bill.
- William H. Rogers:
- Thanks, Ankur. I'll begin this morning with a high level overview of the quarter, and then I’ll turn it over to Aleem to discuss the results in more detail. Following Aleem’s comments, I'll review our performance at the segment level and wrap up with my perspectives on 2014 as a whole. Throughout the year we made significant progress on several fronts, continue to expense discipline and further improvement in credit quality, help to offset the impact of the sustained low rate environment on revenues and translated into core earnings growth and lower adjusted tangible efficiency ratio. Our performance in the fourth quarter continued that momentum. Reported earnings per share for the quarter were $0.72 on net income of common of $378 million. This quarter’s results included a $145 million legal provision to both resolve and reserve for legacy mortgage matters. We remain focused on resolving these matters in a prudent fashion and this quarter’s accrual was another step in the right direction. Excluding the legal provision adjusted earnings per share were $0.88 up 9% sequentially and 14% year-over-year. Total revenue was up modestly relative to the prior quarter. Net interest income was essentially flat as it has been in prior quarters with solid loan and deposit growth offset by continued margin compression. Non-interest income was up 2% sequentially driven primarily by higher mortgage related income and good performance in investment banking. Adjusted expenses were generally stable to the prior quarter, however down a full 7% compared to the prior year driven by continued expense reduction efforts, lower cyclical cost and the sale of RidgeWorth. Importantly for the full year we reduced our expense base from 2013 as adjusted expenses were down nearly $200 million or 4% year-over-year. Accordingly we met our efficiency ratio goal with an adjusted tangible efficiency ratio of 63% for the year well below the target we set at the beginning of the year. Given our out performance in 2014 and the real revenue headwinds we faced in 2015 further progress in the short-term becomes much more challenging. However, we are committed to delivering further efficiency improvement this year albeit modest to stay on track to achieve our primary long-term goal of a sub-60 efficiency ratio. Moving to the balance sheet average performing loans were up 2% on a sequential basis and 6% year-over-year with continued momentum in C&I, commercial real estate and consumer. Deposit growth improved this quarter up 4% sequentially and 7% compared to the prior year. A portion of this growth is seasonal and temporary in nature, but our core growth initiatives are gaining momentum driven by better execution and enhanced capabilities. Our credit quality continue to improve with NPLs down 17% and net charge-offs declining 11 basis points compared to the third quarter both reaching new multi-year lows, while improving economic conditions have played a role in our strong asset quality performance this is also was the result of significant actions we’ve taken over the past several years to both de-risk and diversify our balance sheet and improve the quality of our production. Finally, our capital position continues to be strong and was relatively unchanged from the previous quarter with Tier 1 common estimated to be 9.7% on our Basel III basis. So with that, let me turn it over to Aleem to provide some more details on the financials.
- Aleem Gillani:
- Thanks, Bill. Good morning, everybody. Thank you for joining us as we wrap up 2014 and look forward to 2015. Before I begin my review of this quarter, I’ll remind you that our 2013 and 2014 reported results are impacted by certain non-core items the details of which are included in the appendix of our earnings presentations and release. These items can skew both quarterly and annual comparisons and therefore I will primarily focus on adjusted results to make the core trends more clear. Earnings per share in the fourth quarter were $0.72 including a $145 million legal provision related to previously disclosed legacy mortgage matters which reflects increase legal reserves and the final settlement of a specific matter. This legal accrual was recorded as we made further progress on certain matters in the fourth quarter accordingly based on what we know today we would expect our reasonably possible legal losses in excess of reserves to decline by a roughly similar amount. Excluding the impact of this provision adjusted earnings per share were $0.88 which were 9% higher than the prior quarter and 14% higher than the fourth quarter of last year. The sequential increase was driven by higher non-interest income, a lower provision for credit losses and a slightly lower effective tax rate. Compared to the fourth quarter of last year earnings growth was driven by a 7% reduction in adjusted expenses, higher mortgage-related revenue and a lower provision expense which together more than offset the loss of income from RidgeWorth. For the full year adjusted earnings per share increased 18% compared to 2013 as solid balance sheet growth, lower expenses and improved asset quality more than offset a reduction in mortgage production income and a 17 basis point decline in the net interest margin. Let’s review the underlying trends in more detail starting on Slide 5. Net interest income was stable relative to the prior quarter as solid loan growth offset the effective margin compression. Net interest margin declined 7 basis points due to the decline in commercial loan swap income and lower securities yields which resulted from higher premium amortization as MBS cash flows increased. Core C&I loan yields excluding swap income were relatively stable compared to the prior quarter. However, we expect further compression in this asset class given the competitive landscape and low interest rate environment. As we have said before loan yields in the wholesale segment are typically lower however, the C&I business often brings with it additional non-interest income and deposit revenue opportunities. Our intent is to meet the full suite of our clients’ needs and therefore maintain a disciplined focus on overall returns. On a year-over-year basis net interest income was also stable as 8% average earning asset growth offset the 24 basis points of margin compression. Looking at the full year net interest margin declined more than we had anticipated at the beginning of last year as wholesale banking loan growth was stronger than expected and yields continued to compress. In addition, the yield curve flattened significantly in 2014 with ten-year rates declining 80 to 90 basis points from already low levels. Looking forward, we expect first quarter net interest margin to decline approximately seven to nine basis points from the current level driven primarily by lower commercial loan swap income. In addition, all things being equal, net interest income will decline by approximately $50 million from the fourth quarter to the first quarter, given lower commercial loan swap income and too fewer days coming up. We have been and will continue to carefully manage the usage and duration of our overall balance sheet in light of the continued low interest rate environment. While also being cognizant of controlling interest rate risk in advance of what we expect will eventually be higher interest rates. Moving on to slide six, adjusted non-interest income increased $9 million from the prior quarter, driven primarily by higher investment banking and mortgage related income. Investment banking income increased $21 million due to higher syndicated finance and M&A revenues. Mortgage production income increased $16 million on improved gain on sale margins and high refinance activity both as a result of lower rates in the quarter. Mortgage servicing income increased $8 million sequentially as a result of a larger servicing portfolio and higher seasonal payment activity in the fourth quarter. Trust and investment management income was down $9 million compared to the prior quarter driven primarily by certain seasonal and nonrecurring fees earned in the third quarter. In addition, service charges for deposits declined $7 million, again largely driven by seasonal trends. Lastly, we incurred $5 million of net securities losses in the quarter resulting from a minor repositioning of the investment portfolio. Compared to the fourth quarter of last year, adjusted non-interest income decreased $15 million due to the loss of RidgeWorth fee income, partially offset by an increase in mortgage related revenue. Finally, full year non-interest income excluding this gain on sale of RidgeWorth and its associated revenues was up 4% year-over-year, which reflects the positive momentum we’re creating in our CIB business, as well as retail investment services, private wealth and credit card. Moving to Slide 7, adjusted non-interest expense which excludes the impact of the legal provision was stable to the prior quarter. Personnel expense was down $60 million sequentially, driven primarily by lower accruals on certain incentive and medical costs. While quarterly incentive and benefits costs can be variable for the full year, incentive compensation increased due to improved business performance in 2014, consistent with our pay-for-performance philosophy. Outside processing and software costs increased $22 million due to higher utilization of third party services in addition to normal quarterly variability. Other non-interest expense increased $26 million due primarily the higher legal and consulting costs in the fourth quarter. Adjusted cyclical costs were stable to the prior quarter and down $32 million relative to the prior year. Going forward we do not anticipate these costs to be a meaningful driver of changes in our expense base, with the exception of occasional variability in operating losses. Compared to the fourth quarter of last year adjusted non-interest expense was down 7%, driven by a combination of our efficiency efforts lower cyclical costs and the sale of RidgeWorth. For the full year adjusted expenses were down 4% compared to 2013 and a full 14% compared to 2011. As we look to the first quarter we currently anticipate personnel expenses to increase by approximately $100 million due to the typical increase in 401(k) and 5(k) expenses and also will return to more normal accrual rates on incentive and benefits costs. Bigger picture on an annual basis we do not expect core expenses to decline from the 2014 level given our revenue goals. However our main focus is on the efficiency ratio and thus we will calibrate our expense base against the revenue environment. As you can see on Slide 8, our adjusted tangible efficiency ratio improved to 61.4% from 61.9% in the prior quarter, as we delivered both modest revenue growth and a slight decline in adjusted expenses. Our full year adjusted tangible efficiency ratio was 63%. 230 basis points lower than 2013 despite the significant headwinds from lower mortgage volumes and declining net interest margin. In 2015 our goal is to slightly improve upon last years 63% adjusted tangible efficiency ratio. As Bill noted earlier progress in 2015 will be significantly more difficult than 2014 for a few reasons. First we’re excepting commercial loan swap income to decline by $185 million, which represents a 150 basis point headwind to our efficiency ratio. Second as discussed on the previous slide our core expenses have declined significantly over the past few years and we do not anticipate further declines. And lastly, having achieved a better than projected result in 2014 we are now starting from a lower base than previously expected. Irrespective of the short-term trajectory, we remain firmly committed to our long-term target of sub-60% and achieving this important objective will be a key driver of delivering additional value to our shareholders. Turning to credit quality on Slide 9, our asset quality performance continues to be strong, nonperforming loans declined another 17% sequentially. In small part due to a transfer of $38 million of nonperforming loans to help our sales status, but largely due to outflows that continue to exceed inflows. This significant reduction in the nonperforming loan portfolio was achieved in conjunction with the net charge-off ratio declining 11 basis points reflective of continued strong core performance within the loan portfolio along side modestly higher recoveries in the fourth quarter. Our allowance for credit losses declined to $20 million sequentially that the continued improvement in the overall asset quality more than offset a reserve build in the wholesale banking segment to address uncertainty in the energy sector. While our energy and utilities clients are important to our overall CIB business they represent only 3.5% of our loan portfolio with 70% of the book in the utilities and power, midstream and downstream sectors, which are not as meaningfully impacted the commodity price volatility. Total provision expense decreased $19 million sequentially due to lower net charge-offs, partially offset by the lower reserve release. Over the near-term we expect further the moderating declines in nonperforming loans primarily driven by the residential portfolio. Net charge-off ratios are unlikely to sustain themselves that these levels over the long-term that we are not expecting a significant increase in 2015 relative to 2014. We also expect our loan loss provision expense in 2015 to be fairly stable to 2014. However, the ultimate level of reserves and provision expense will be determine by our rigorous quarterly review processes which are informed by trends in our loan portfolio combined with a view on future economic conditions. Turning to balance sheet trends on Slide 10, average performing loan growth was up 2% sequentially driven by continued momentum in our C&I, CRE and consumer portfolios, partially offset by continued declines in the residential mortgage and home equity portfolios. C&I loan growth was broad based and driven by both our corporate and commercial banking clients. CRE momentum continued this quarter due to growth in both our institutional and regional businesses. Consumer loans were also higher due to growth in our consumer direct, credit card and indirect portfolios. During the quarter we sold $800 million of loans and transferred another $1.1 billion of loans to help our sales status. The net gain or loss on the sales and transfers was immaterial. Collectively these transactions were part of our strategy to optimize our balance sheet and improve returns and going forward we will continue to opportunistically evaluate loan sales to further this strategy. On a year-over-year basis, average performing loans increased $8 billion or 6% driven by broad based growth across most portfolios. End-of-period loans increased to the lower rate of $5.6 billion or 4% compared to the prior year as we conducted approximately $4 billion of loan sales in the second half of 2014. Our solid loan production performance reflects our execution of targeted growth incentives alongside generally improving economic conditions in our markets. Turning to deposit performance, average client deposits were up $4.7 billion or 4% compared to the prior quarter and 7% compared to the prior year driven by improved and broad based growth across all of our lines of business. While a portion of this growth is seasonal and will decline in the first quarter, the majority of the growth is core and reflects both investments we have made in client-facing platforms such as SummitView and our treasury and payment solutions offering and our overall increased focus on meeting more of our clients deposits needs. Rates paid on deposits were stable sequentially and declined by 4 basis points compared to the prior year. Slide 12 provides an update on our capital position. Common Equity Tier 1 expanded by approximately $200 million during the quarter as a result of growth in retained earnings while the estimated Basel III Common Equity Tier 1 ratio remain relatively stable at 9.7% due to balance sheet growth. Tangible book value per share increased 2% from the prior quarter and a full 10% compared to the prior year due primarily the growth in retained earnings. During the quarter we issued $500 million of non-cumulative perpetual preferred stock as part of a longer term process to optimize the mix between common and non-common Tier-1 capital. We also repurchased $110 million of common stock. The cumulative actions we’ve taken to improve our risk and earnings profile combined with our strong capital and liquidity levels should help us to further increase capital returns to shareholders. We submitted our 2015 capital plan earlier this month and we’ll have more to report on this matter in March. Lastly, as of year-end our liquidity coverage ratio continues to exceed the January 1, 2016 90% requirement. With that I’ll now turn things back over to Bill to cover our business segment performance.
- William H. Rogers:
- Great, thanks Aleem. And I’ll draw your attention to Slide 13. In Consumer Banking and Private Wealth Management we continue to make progress on our core growth initiative while holding a lot on expenses. Looking at the numbers, net income declined 5% sequentially, but was up 13% year-over-year. The sequential decline was driven primarily by higher provision expense, due to some moderating asset quality improvement. Total revenue was essentially flat compared to the third quarter, but was up 3% year-over-year. Net interest income increased relative to both prior periods driven by continued growth in loans and deposits. Non-interest income was down sequentially due to seasonally higher income and certain nonrecurring fees earned in the third quarter. Year-over-year, non-interest income was up 3%, driven by growth in Wealth Management related income and card fees. Average loans were up half a percentage point on a sequential basis with double digit growth and consumer direct partially offset by continued run-off in the home equity portfolio and certain loan sales during the quarter. Average deposits grew 3% sequentially reflecting our increased focus on meeting more of clients deposit needs particular in our affluent, high-net worth businesses. Turning to the full year results, net income was up 7% driven by higher revenue and lower provision, partially offset by higher expenses. Total revenue increased 2% driven primarily by 6% growth in Wealth Management related fees which reflects our increased investment in people, tools, technology to better meet our client needs. These investments were the primary drivers of growth and expenses year-over-year. The full year results in this business demonstrate good execution of the core strategic initiatives we’ve outlined in the past. Improving Wealth Management related income, enhancing the growth and returns of our consumer lending portfolio and making critical investments in talent and technology. Heading in 2015, we want to continue our core revenue momentum. However, expense discipline will also remain important as we continue to balance cost reduction opportunities with selective investments for growth. Turning to Slide 14, in our wholesale business, wholesale banking remains a key growth engine for the company and we continue that momentum in the business for the fourth quarter. While net income declined due to an increased provision expense, revenue increase compared to the prior quarter and prior year. Net interest income was up 5% sequentially and 11% compared to the fourth quarter of last year driven by broad-based loan and deposit growth. Adjusted non-interest income declined 5% sequentially and 10% year-over-year due to lower trading income and structured finance related fees. These trends were partially offset by higher investment banking revenue and particularly good performance given the market volatility in the fourth quarter. Average loan balances were up 5% when compared to the prior quarter with growth across the entire platform, we’d growth in almost all of our CIB verticals in addition to the momentum and core commercial real estate, national corporate banking and our specialty commercial groups in particular auto dealer and not-for-profit and government. Loan yields remained under pressure constraining our margin however as we’ve said before our risk adjusted return hurdles incorporate the entire client relationship which also includes deposits and fee income generation. For the full year client deposits increased 10% and capital markets related fees were up 9%. Looking in our full year results adjusted net income increased 10% driven by solid revenue growth and lower provision, fees were up modestly as lower trading and leasing income combined with the exit of a legacy affordable housing partnership were more than offset by 13% growth and investment banking income. Our full year investment banking performance reflects broad-based growth with record, our new record results across debt and equity capital markets and M&A. The success of our platform reflects our continued investment and talent to both expand and diversify our capabilities. This year we have been able to leverage our one team approach to better deliver our capital markets capability to not only our larger corporate client base, but also our core commercial banking and commercial real estate clients and that’s a value proposition that’s increasingly well received. Looking forward our pipelines remain healthy and I am confident that the wholesale organization has the momentum to drive further growth in 2015. Shifting to mortgage adjusted net income in the mortgage segment increased $38 million on a sequential basis driven by growth and fee income and lower provision. In particular production related income was up $16 million due to higher volume and gain on sale margins as a result of lower interest rates. Servicing related income was up $9 million due to the recent servicing acquisitions and a seasonal increase in payments. Adjusted expenses were up 12% sequentially due in part to the increased plan activity of the quarter. For the full year mortgage delivered core profitability driven by 35% reduction in core expenses. Revenue declined modestly as growth and net interest income was more than offset by decline in fee income. Core mortgage production income declined 47% year-over-year however mortgage servicing income more than doubled driven mainly by lower prepayments in the servicing portfolio in 2014. The adjusted tangible efficiency ratio declined from triple digits in 2013 to 74% in 2014. Over the past year our core mortgage business demonstrated significant improvement, this progress was driven by a lot of heavy lifting to normalize our cost base and improve our risk profile. Most of that is now complete and optimistic will be able to more firmly focus on the core strategies in place to meet more client needs, drive higher revenue and deliver incremental efficiency improvement. Now before we begin the Q&A part of the call, I would like to take a moment to highlight our accomplishments during the year. So coming into 2014 we faced several meaningful revenue headwinds namely the end of the mortgage refi boom and the ongoing impact of prolong low rate environment on net interest margin. However, we remained focus on the commitments we made our stakeholders and we delivered on those goals. For our clients we increased investments in people and enhance capabilities to better anticipate and serve their needs. For our teammates we invested more in training and opportunities to improve their own financial well being. For our local communities we continue to support economic growth through purposeful investments, active partnerships and volunteer commitments. Our 2014 United Way campaign was the most successful in the company’s history with teammates donating nearly $6.5 million and for our shareholders we delivered strong efficiency performance and a significant improvement in asset quality the result of which was 18% earnings growth and a 10 basis point improvement in ROI. In addition we more than doubled our capital return. Separately we were able to resolve several outstanding legacy mortgage matters and this quarters legal provision expenses in another important step in that process. And then finally for all the teammates on this call, I would like to thank them for what they have done and continue to do to transform our company. We are unified in our purpose of lighting the way to financial well being for our clients and our communities, and in our ongoing drive for delivering improved performance for our shareholders. So teammates thank you. And Ankur let me turn that back over to you.
- Ankur Vyas:
- Okay, thanks Bill. Brad, we are now ready to begin the Q&A portion of the call. As we do so, I’d like to ask the participants to please limit yourselves to one primary question and one follow-up so that we can accommodate as many of you as possible today.
- Operator:
- Thank you, sir. [Operator Instructions] And our first question will come from Matt O’Connor of Deutsche Bank. Your line is open.
- Matt O’Connor:
- Good morning.
- William H. Rogers:
- Good morning, Matt.
- Aleem Gillani:
- Hi, Matt.
- Matt O’Connor:
- I was wondering if you could elaborate on the strategy of trying to optimize the balance sheet by some of the loans that you are selling or moving to held-for-sale or just the kind of approach you are taking in terms of the criteria to evaluate the loans.
- Aleem Gillani:
- Certainly, Matt. I guess the first criteria is whether these are single service clients or they’re sort of multi-product clients and to the extent that they are single service clients that makes these loans more eligible for loans that we might be willing to sell. The second criteria is financial, we are looking at the overall return on that relationship and on that transaction and for lower ROA loans those are the ones that we would tend to look at first. So in the context of our overall strategy which is the optimizing the entire balance sheet, looking at the risk profile of those loans and our balance sheet, think of this as sort of a continuation of the approach we’ve actually taken over the last couple of years that continue to grow in terms of meeting all of our clients needs and also improve the financial performance and returns of the company.
- Matt O’Connor:
- And then I guess segueing into just net interest income overall you gave pretty explicit guidance for 1Q, but as we think about all the moving pieces including some potential loan sales and obviously lower rates here, how would you think about the trajectory off of the 1Q level for the rest of 2015?
- Aleem Gillani:
- Well, for net interest income overall as I think about the year, I think we are going to be treading water around that $1.2 billion type number, we continue to add terrific new business, we continue to grow the balance sheet with both new loans and getting deeper with our current clients, but the rate environment just continues to grind down and offset all of the benefits. So I think for a while we are just going to be treading water around that $1.2 billion level.
- Matt O’Connor:
- I mean just last follow-up, you talked about plans to grow revenue in your prepared comments, so obviously if net interest income is relatively flat, you are counting on fees, which categories or businesses do you think will be the key drivers?
- William H. Rogers:
- Yes, Matt, the good news is we’ve been making investments, so this is not sort of starting from sort of a flat surface and the places where we’ve been making investments and we're seeing the results, and I’ll name them sort of not necessarily in order but sort of go around the horn, what you have obviously seen continued progress in the investment banking part of our business and we’ve added more capability there but we’ve also expanded that reach within our company, so we’ve seen now much more expanded fee generating capability out of our commercial business and out of our commercial real estate business the investments we’ve made in corporate banking sort of around the country, you are starting to now see some of the fee generation that comes from that. So there are lots of momentum builders in that business. Everything on the private wealth side has continued to have momentum, we’re up about 6% there, we’ve continued to invest in people, we’ve continued to invest in technology, we're sort of net in hiring mode in that business, but we’ve also done things like put premier bankers in our branches and they are going to really help, we’ve given them a lot more data and a lot more analytics and they are really going to help us mine what we have as an already sort of bias to the affluent in our retail system and we're going to mine that better. And then mortgage, so and it’s great to mention mortgage on the positive side, we're going to see some movement there, we’ve already seen here the first couple of days some refi activity, I would love to extrapolate the next two days across the rest of the year, I’m not sure we can do that but we're starting to see some activity not only in the refinance side, but just sort of the core basic business in our retail markets as our markets improve. So there are a number of things, I mean those are sort of just three, but there are a number of things that we're investing in and credit card would be another on the smaller side in terms of fee generation.
- Matt O’Connor:
- Okay. Thank you very much.
- Operator:
- Our next question comes from Ryan Nash of Goldman Sachs. Your line is open.
- Ryan M. Nash:
- Hey, good morning guys.
- William H. Rogers:
- Good morning Ryan.
- Aleem Gillani:
- Good morning Ryan.
- Ryan M. Nash:
- Aleem, I just wanted to make sure I got the message correct on expenses; I think this is now the second straight quarter. We did see expenses come below the 1.3 level; I think you averaged around 1.3 for the year. Given the fact that I know there are some seasonal elements to it, does the 1.3 to 1.35 level still hold and the reason I ask, it sounds like the revenue environment is marginally more challenging at this point in time, so I just want to get a sense of where you would expect expenses to fall out for the full year?
- Aleem Gillani:
- Yes, Ryan I do think that full year expenses as I look at them today are going to be in that sort of $5.2 billion to $5.3 billion range for the year. But clearly as you point out, if they are revenue dependent and the revenue environment could move us out of that range either higher or lower and obviously as we look at overall expenses we’re focused very much on the efficiency ratio. So as we think about what the revenue environment will be and how we adjust expenses against that revenue environment if you start off with a core expectation between $5.2 billion and $5.3 billion. And then think about we will adjust, we will calibrate that as revenues go up or down. Thinking about Q1 in this context, Q1 probably is up towards the top end of the quarterly range as a result of the normal seasonal effects.
- Ryan M. Nash:
- Got, it. And then just putting all the guidance together do you still expect to grow earnings in 2015 from the 3.24 level?
- Aleem Gillani:
- We are going to be targeting continued improvement at the Company. So whether that is efficiency ratio, whether that’s earnings, whether that’s returns we want to continue to make this company better over time.
- Ryan M. Nash:
- Got it. I figure I had to take a shot. And I guess lastly Bill you talked about 3.5% energy exposure, but can you just give us a sense of energy exposure for the overall bank both from a lending perspective and from a fee income perspective. How is what we’ve seen happen to energy prices impacting capital markets? And then from a consumer perspective are you starting to see the benefits of lower gas prices showing up in both consumer spending and willingness to borrow?
- William H. Rogers:
- Yes, sure I’ll try to hit all of those. I think Aleem, outlined the portfolio, it’s about 3.5% of the portfolio and about 70% of that portfolio is really not significantly related to falling oil prices, think about 50% of portfolio is utility. So that sort of suffered a large part as midstream, that’s just the transporting of oil from one place to another, that is not as impacted by prices as a much lower exposure and the E&P side and the oil field services side. From a capital markets perspective and really also loan growth perspective, I mean energy has been an important part of what we do, we don’t want to under mine that, but it’s been sort of less than 10% of our loan growth. And the fee part of the business has been pretty consistent over the last several years. So this is not something that’s been disproportionately part of the fee income business. Did some of the fee business in the fourth quarter that was energy related not happen yes, that would be accurate and high yield markets sort of tightened up will some of that happen this year maybe. I think actually we’re pretty well positioned, you remember we made a small acquisition of a company called Lantana which is in the advice business and while I think once sort of things level add a little bit probably sort to the later part of this year I think you’re going to see a lot of activity actually in the energy side as people sort of reset and think about their structure. As it relates to the consumer side I mean I think you sort of hit it accurately I mean relative to given the fact that we’re not in a lot of the geographic markets that are going to be impacted more by a fall in oil prices well our consumers will see sort of that increase in tax refund equivalent of fall in oil prices. Have we seen it yet, I mean it might be too early I mean I’ve looked closely at spending numbers and a credit card numbers and those kinds of things while they’re marginally up its might be a little bit early to sort of see the total impact of that, but I have to believe that over the course of the year we’ll see the most positive side for us arching much more towards the consumer side than the risk on the energy side.
- William H. Rogers:
- Ryan, I’d also point out that the vast majority of our corporate and commercial clients are in our footprint and they’re going to also benefit from the drop in energy prices. So we’ve got this clear differentiation between energy and consumer, but even within the corporate and commercial base our overall client base ought to do better with lower energy prices.
- Operator:
- Our next question will come from John Pancari of Evercore ISI. Your line is open.
- John Pancari:
- Good morning.
- William H. Rogers:
- Good morning, John.
- Aleem Gillani:
- Hi, John.
- John Pancari:
- On the expense side on the comp expense sorry if you’ve already commented on it, but just want to get a little more color on the decline in the comp expense the drivers of it and how sustainable that decline is, is it all related to the efforts you’ve been doing on the headcount side and the efficiencies and should we borrowing any typical seasonality, should we use this as a new base?
- Aleem Gillani:
- Now let John, it’s a little bit above, it’s a little bit of we continue to get more efficient, but in addition we also had a reversal of some incentive accruals and actually for the year our medical costs came in lower than we were expecting our experience on that side ended that being a little bit better. So some of the benefit in the fourth quarter was a result of those and as I said earlier if I think about total comp expense I would increase that in Q1 about a $100 million relative to Q4 some of that for normal FICA/401K seasonality and some of that just because we’re starting from the lower number in the fourth quarter.
- John Pancari:
- Okay, thank you. Sorry, I have to repeat that. And then on the commercial loan growth in the quarter just want to get some additional detail behind the drivers of the growth and then also your expectation around the C&I portfolio growth in coming quarters?
- William H. Rogers:
- The good news John that’s really, really broad based I mean we really saw - if you look at sort of the total year virtually every vertical that we’re involved in on the C&I space group, so some in obviously different paces, but it reflects the diversity of our business mix, the investments that we’ve made, it was fairly universal, it wasn’t sort of in anyone particular place. We did see a little uptick in utilization, I don’t want to sort of overplay that because quarter-to-quarter it can go up and down, but this quarter was up and up little more than we have seen in previous quarters. I think on balance that’s a good thing, hopefully that reflects sort of more of that investment capital type of horn, but it was very broad based.
- Operator:
- Our next question will come from Mike Mayo of CLSA. Your line is open.
- Mike Mayo:
- Hi, can you talk more about the efficiency if you striped out the known headwinds with the swaps, how much would you expect the core efficiency ratio to improve in 2015 and if we had to identify three of the reasons for the [indiscernible] efficiency what are you most focused on?
- Aleem Gillani:
- Well, Mike, I think we’re most focused on growing fee income and meeting more of our clients needs across everyone of our segments as well as connecting clients better across our businesses. So I think we have got, as Bill pointed out earlier, lots of opportunity in that space to continue to do better and the growth in that space along with a no lessening in our expense discipline I think will allow us to continue to improve our efficiency ratio in 2015 relative to where we ended up in 2014.
- William H. Rogers:
- Yes, I think it’s - I don’t want anyone to think we are hedging it all on our commitment to our expense discipline, that commitment is in place, we’ve created a lot of really positive momentum it continues. What we are balancing is the investment opportunity, so as we continue to achieve efficiency and expense saves, I want to make sure that we're also investing for the future and that’s a delicate balance of walking and as Aleem mentioned, we’ll calibrate. So we’ll calibrate what's happening on the revenue side to the expense side that always does have work quarter-for-quarter and we're committed to continue to improve on the efficiency ratio.
- Aleem Gillani:
- Mike, I don’t want to make light of how hard this is going to be, this is really hard in 2014 we had $200 million of revenue headwinds, we fought our way through that and got better. In 2015 we're going to have another $200 million of revenue headwinds. So after doing it once, it gets harder to do it again, but we understand the task in front of us and we're going to be working hard to achieve it.
- Mike Mayo:
- I mean the reason I asked the question, again I mean your efficiency ratio was 61.9 in the third quarter, 61.4 in the fourth quarter and your guidance which certainly is appreciated is for under 63%. So you are kind of already there. So on a headline basis it might be tough for us to figure out some of the ins and outs or can you break it out or?
- William H. Rogers:
- Well I think that’s an easy math.
- Aleem Gillani:
- Yes, you have always have a seasonal impact.
- William H. Rogers:
- Yes.
- Aleem Gillani:
- Clearly what happens from the - just on the FICA and reset loan, I mean you have a significant reset in the first quarter, so there always is some seasonal impact and of course we're catching us at the best part of that seasonal impact.
- William H. Rogers:
- Yes and don’t forget the revenue headwind that starts now that starts in 2015 relative to the 2014 on the swaps. So we loved being able to deliver numbers that were 61 Mike, but we're starting 2015 in the tougher place.
- Operator:
- Our next question will come from Ken Usdin of Jefferies. Your line is open.
- Kenneth Usdin:
- Hi thanks good morning.
- William H. Rogers:
- Good morning Ken.
- Kenneth Usdin:
- Aleem, I was wondering this quarter you didn’t make many adjustments to that swap income portfolio ladder and just given where rates have gone and it changes - the macro view of when this head might move, how inclined are you to continue to continue to add to swaps in the future on top of what you have had done in the past.
- Aleem Gillani:
- Yes, I think we continue to look at that very actively Ken through our ALCO process as you know we're continuing to do new loans, or continue to grow the business and those come on, the majority of those loans come on floating, so deciding whether to fix them or not is sort of part of overall balance sheet strategy and we did do a little bit in the fourth quarter, nothing overly substantial on that side, but we’ll continue to manage the overall balance sheet duration and continue to be opportunistic to the extent that we can. And if there are large moves one way or the other we’ll consider that in our overall balance sheet strategy. In the fourth quarter we had some small action, in addition you saw the securities loss that was basically moving Level 2 HQLA into Level 1 to make sure that we continue to stay compliant under the LCR. So there are few of these sorts of minor little actions going on back and forth, but as we go through 2015 if there are opportunities that makes sense from a risk versus return trade off we’ll continue to take those.
- Kenneth Usdin:
- Okay, got it and a follow-up on the curve, just can you give us a flush out of context of where and how that the low ten-year affects your portfolio or not relative to peers in terms of if we stay here and the lower than expected or hope for ten-year, what parts of the portfolio should we be mindful off?
- William H. Rogers:
- Yes. Well I don’t know how it would affect us relative to peer, but when you look at us specifically the ten-year rate affects us in a couple of ways. Number one, it affects us in terms of mortgage rates and mortgages that we put in our portfolio. Typically we’re putting $200 million to $250 million a month of jumbo mortgages within our portfolio and those are split, some fixed, some floating or some fixed, some aren’t and the other place of the ten-year rate affects us is in the investment portfolio and as the rate drops that mortgage-backed securities we have in our investment portfolio tend to prepay a little bit faster and we reinvest that cash at slightly lower rates. So with a dramatic drop in rates such as we’ve seen, we would get probably a little bit more public awareness, a little bit more publicity and some of that will happen a little bit faster. The offset to that from a NIM and net interest income perspective of course is increased refis and increased fee income in the mortgage business that I’m hope will act to completely offset the drop in net interest income from lower rates.
- Operator:
- Our next question comes from John McDonald with Sanford Bernstein. Your line is open.
- John E. McDonald:
- Hi, good morning guys. I was wondering about just on the credit outlook Aleem, I think you said you kind of expect to maybe bounce around the charge-off level you are at now, is that maybe 30 basis points kind of in that ballpark, is that what you are thinking about?
- Aleem Gillani:
- Well, I think for full year 2014 John; we ended up around 34 basis points, 35 basis points.
- John E. McDonald:
- Okay.
- Aleem Gillani:
- And we’re expecting a substantial move from that. Remember our through the cycle expectation for charge-offs is 40 to 70, obviously we’re at a very strong point in the cycle. We’ve been below the bottom end of our range and our current expectation is that we’ll stay around that kind of a number in 2015.
- John E. McDonald:
- Okay, and I think you said the same thing for the actual provision dollars as well?
- Aleem Gillani:
- That’s exactly right. As we look at it today, with what we know today we would expect provision in 2015 to be right around where it was at 2014 obviously that change is quarter-to-quarter, as we review our portfolio and economic conditions, but as we look at it today I’d expect it to be right around the same kind of level.
- Operator:
- Our next question comes from Terry McEvoy of Sterne Agee. Your line is open.
- Terry McEvoy:
- Hi, thanks good morning.
- Aleem Gillani:
- Good morning.
- Terry McEvoy:
- In the past you’ve talked about a CRE heat map of the country could you just maybe discuss areas of strength in the fourth quarter in where you see the best growth opportunities in 2015?
- Aleem Gillani:
- Sure. When we think about sort of CRE if I would think about the portfolio maybe almost in some kind of sequence office, multifamily, warehouse, industrial and retail probably in that order sort of as a global basis. Office for us primarily concentrated top markets and top spaces, so it’s more about credit enhancement and positive part. And in large markets it has tended to perform well and be part of the growth. On the multifamily side it’s a little spottier and fairness I mean there is some markets that we do a lot of work with some markets where the absorption balance is just right. Globally it’s still okay, but their pockets were, we’ve gone from green to yellow in our map. And we are probably pulling back in a couple of places in multifamily. Warehouse and industrial is sort of just of waiting, I mean I think that’s coming back more slowly and we see selective pockets for us part of what’s happening with the east coast ports opportunities, we are starting to see that kind of investments, so you see some of the challenges with the west coast ports, you see the investments that have been made on the east coast. So there has been a lot of development and discussion and dialogue and I think we’re really well positioned long-term there. Retail is just - this would be a long time before it comes back, I mean I think that’s in a slower place that’s not where we have our primary emphasis.
- Terry McEvoy:
- And then just as a follow-up, the increase in the provision within wholesale banking in the prepared remarks you talked about taking a look at the energy portfolio, could you just maybe expand specifically on what you did in terms of a stress testing and the analysis around the potential risk there that contributed to that small uptick.
- William H. Rogers:
- Yes, Terry, we actually looked at our energy exposure from a bottoms up perspective, we’ve been going through the names, obviously this started in about mid December or so as the market move started to steepen. We looked at our largest energy exposures, accessed each one from a bottoms up perspective that process is on going and we also looked at our overall exposure from a qualitative perspective and decided that while it didn’t look like quantitatively we needed to make an adjustment, it would be prudent and appropriate for us to do so. So the increase in provision is in that context, we haven’t seen any stress amongst any of our clients in that portfolio so far, it’s still early, but we haven’t seen any yet, but we’re just trying to do the prudent thing and get ahead of what looks to be like a big move globally.
- Aleem Gillani:
- Brad, we have time for one more question I believe.
- Operator:
- Thank you, sir. Our last question comes from Matt Burnell of Wells Fargo Securities. Your line is open.
- Matthew Burnell:
- Good morning gentlemen, just a couple of questions on mortgage. I noticed that production in the quarter was up about 20% year-over-year, I guess I’m just curious if you could give us a little more color on your outlook for that business particularly in the wake of what have been some far more attractive mortgage rates throughout most of your footprint over the last few weeks and any guesses as to how long that may last?
- Aleem Gillani:
- Yes, sequentially we’re up about 4% from third and the fourth quarter was - refi was about 40% to 50%, so it really wasn’t sort of the big refi part yet that’s fairly consistent with where we were, so we had seen sort of some core parts of our business. Now that been said, applications are completely different, applications are 60%, 70% plus kind of refi, the first couple of weeks in January. Particularly last few days have actually been quite good and so we are seeing the potential there. What I really like is where it’s coming from, so as you know, we invested in our consumer direct business, so to think more online our core retail business. So it’s coming from our markets, we’re keeping our correspondent business sort of at about 50%, so where it was at the fourth quarter and so where it is now. So it’s coming in our higher margin areas and we're able to balance that. I want to be careful about over projecting, you can get excited about a couple of weeks and you can extrapolate numbers and get some big numbers as a result of that but I feel good about where its coming from, I feel good about how we're positioned to take advantage of it and the last few days have been very good, people have responded. As you would imagine the denominator let's say for total refinance is smaller, I mean just as you continue to go through a declining rate cycle that happens, but those that are eligible seem to be active.
- William H. Rogers:
- Then Matt, I would add to that as you know we're a very good efficient and effective servicer and we’ve been adding to our servicing portfolio over the course of the year, if you look at sort of end of 2013 to end of 2014, we’ve added about $9 billion to our servicing portfolio and that’s generating a nice increase in servicing income for us as we take advantage of our competitive advantage.
- Aleem Gillani:
- And it is a good discussion too related to the efficiency ratio, so for example if this heats up a little more than we think. It could be slightly dilutive to our efficiency ratio and accretive to our earnings and we’ll make that trade right now. So that’s a good trade for us to make.
- Matthew Burnell:
- Just staying on the theme of fee revenues, just curious as to your outlook in the first quarter and if you have visibility a little further than that that would be helpful for the capital markets business. That obviously was quite a good performer. This quarter has been pretty good in the second half of 2014. Just curious given all the vitality in the markets right now what your outlook might be for the first quarter or first half in investment banking capital markets?
- Aleem Gillani:
- Yes, since you stretched it to the first half that will make it a little easier, because there is some volatility and certain markets are more active than others and clients are coming back and so reevaluating where they stand and what they want to do, but based on our pipeline they look great, our pipeline sort of continue that same momentum that we’ve had in the past. I just think by quarter-by-quarter its going to look potentially a little bit different, but based upon the investments we’ve made which I talked about earlier the pipeline the diversity of our mix and some parts that are actually starting small that have a much larger opportunity to growth, I don’t have any reason to be anything less than optimistic. I think we're going to continue on the same phase, it’s just going to be tricky quarter-by-quarter.
- Ankur Vyas:
- Brad, this concludes our call. Thanks to everyone for joining us today, and if you have any further questions, please feel free to contact the IR department.
- Operator:
- Thank you for your participation on today's conference call. At this time, all parties may disconnect.
Other Solidion Technology Inc. earnings call transcripts:
- Q3 (2019) STI earnings call transcript
- Q2 (2019) STI earnings call transcript
- Q1 (2019) STI earnings call transcript
- Q4 (2018) STI earnings call transcript
- Q3 (2018) STI earnings call transcript
- Q2 (2018) STI earnings call transcript
- Q1 (2018) STI earnings call transcript
- Q4 (2017) STI earnings call transcript
- Q3 (2017) STI earnings call transcript
- Q2 (2017) STI earnings call transcript