Solidion Technology Inc.
Q3 2014 Earnings Call Transcript

Published: 17 Oct 2014

[Executives:]

Ankur Vyas - Director, IR Bill Rogers - Chairman & CEO Aleem Gillani - CFO

[Analysts:]

Ken Usdin - Jefferies Matt O'Connor - Deutsche Bank Ryan Nash - Goldman Sachs Betsy Graseck - Morgan Stanley John Pancari - Evercore Partners Erika Najarian - Bank of America Mike Mayo - CLSA Marty Mosby - Vining Sparks

[Operator:]

Welcome to the SunTrust Third Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference. (Operator Instructions) This conference is being recorded. If you have any objections, you may disconnect at this time. Now I’ll turn the call over to Ankur Vyas, Director of Investor Relations. You may begin.

[Ankur Vyas:]

Thanks, Christine. Good morning, and welcome to our third-quarter 2014 earnings conference call. Thanks 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 the 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.

[Bill Rogers:]

Thanks, Ankur. As usual, I'll begin this morning with a brief overview of the quarter, and then I’m going to turn it over to Aleem for details on the results. So, following Aleem’s comments, I'll wrap up our prepared remarks by reviewing our performance at the business segment level. Earnings per share for the quarter were $1.06 on net income to common of $563 million. However, as previously disclosed, we recognized $130 million discrete tax benefit, which we returned to shareholders through a one-time share buyback. Excluding this gain, earnings per share were $0.81 on net income to common of $433 million. Our adjusted results were in line with the previous quarter and up 23% from last year, reflecting solid loan and deposit growth, further efficiency improvements, and continued strong asset quality performance, all of which helped mitigate the impact of the persistent low rate environment. Our adjusted revenue was up 3% year-over-year, but declined 3% from last quarter. The sequential decline was primarily a result of our investment banking business rolling off record results in the second quarter and the loss of some investment management income due to the sale of RidgeWorth. Net interest income was generally stable relative to both periods as solid loan growth mitigated spread compression. With regard to non-interest income, as we said before, several of our fee-oriented businesses are subject to some seasonality. With that in mind, I believe our year-to-date fee income performance tells a more accurate story of how we’ve been able to leverage our investment to these businesses to drive more consistent execution and deepen client relationships. Our non-interest income, excluding the impact from RidgeWorth and mortgage-related revenues, was up 7% year-to-date with meaningful improvement in investment banking, retail investment services and traditional private wealth. These positive trends combined with higher mortgage service and income helped offset the 60% year-to-date decline in core mortgage production related fees. Expenses declined relative to both periods, previous quarter and the prior year, and notably, our adjusted tangible efficiency ratio was 61.9% for the quarter. That brings our year-to-date ratio to 63.5% and keeps us on clear track to deliver on our 2014 sub-64% efficiency ratio commitment. Our performance this quarter demonstrates our continued focus on efficiency improvement, and importantly, our steady progress towards our long-term target is evidence of our methodical transformation to a more efficiency conscious culture across the company. So, looking at the balance sheet, period-end loan balances increased 2% sequentially led by growth in C&I, traditional CRE, and our consumer direct portfolio. However, average performing loans were flat as a result of the $2 billion guaranteed residential mortgage loan sale this quarter. Average client deposits grew 1% relative to last quarter with favorable mix shift continuing. We’ve built positive and broad-based momentum across our lending platforms and are focused on ensuring our deposit growth keeps pace. Our credit quality performance continues to be strong, and in the quarter we were able to further improve the overall asset quality of the balance sheet through targeted non-performing asset reductions. As a result, NPLs declined 15% sequentially and net charge-offs ticked up slightly to 39 basis points. Finally, our capital position continues to be strong and was relatively unchanged from last quarter with Tier 1 Common estimated to be 9.7% on a Basel III basis. So with that as a quick overview, I’ll turn it over to Aleem to provide some more detail on the results.

[Aleem Gillani:]

Thanks, Bill. Good morning, everybody. We’re glad you are able to join us at our slightly later start time this morning, and we are pleased to be able to accommodate those of you who needed to watch Thursday Night Football last night. Earnings per share this quarter were $1.06, and included in that result is a $0.25 benefit that we recognized upon the completion of a tax authority exempt. Excluding the impact of this benefit, adjusted earnings per share were $0.81, which was in line with the previous quarter and 23% higher than the third quarter of last year. The year-over-year increase was driven by 3% adjusted revenue growth as a result of higher mortgage servicing income, a gain on sale of mortgage loans, which I will discuss later, and slightly higher net interest income. A 3% reduction in adjusted expenses also contributed to the year-over-year improvement as we continued to execute on our efficiency initiatives and benefited from lower cyclical costs. These positive trends more than offset the $45 million year-over-year decline in trust and investment management income resulting from the sale of RidgeWorth. Sequentially, earnings per share were flat as the decline in non-interest income and modestly higher provision expense were offset by a 5% reduction in adjusted expenses. Lastly, adjusted year-to-date earnings are up 19% compared to the previous year. A solid balance sheet and fee income growth, lower expenses, and improved asset quality have more than offset the $205 million reduction in core mortgage production income and 14 basis point net interest margin compression during that same time frame. We’ll now review the underlying trends in more detail starting on slide 5. Net interest income was generally stable relative to the prior quarter and prior year as loan growth negated loan yield compression. Net interest margin declined 8 basis points sequentially primarily due to a 7 basis point decline in loan yields. The decline in loan yields was most notable in our C&I book though we also felt this to a lesser degree in our commercial real estate and indirect auto portfolios. The drivers of our loan yield compression are mix shift as wholesale is growing at a faster rate than the rest of the portfolio, and continued competition in our markets and businesses. While loan yields in the wholesale segment are typically lower, C&I business often brings with it additional non-interest income and deposit revenue. Our intent is to meet the full suite of our clients’ needs and maintain a disciplined focus on entire relationship returns. Securities yields declined 9 basis points sequentially, primarily due to higher prepayments as MBS cash flows increased into our investment portfolio. On a year-over-year basis, net interest income was relatively flat as solid 6% earning asset growth neutralized the 16 basis points of margin compression. Overall, the net interest margin has declined in 2014 more than we had anticipated at the beginning of the year. As commercial loan growth has been stronger than expected and yields continue to compress. Looking forward, we expect fourth quarter net interest margins to decline approximately 3 to 6 basis points from the current level primarily driven by lower commercial loan swap income. We have been and will continue to carefully manage our overall balance sheet duration and utilization 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 rate. Moving on to slide 6, adjusted non-interest income declined $72 million from the prior quarter driven primarily by lower investment banking income and the loss of investment management income from RidgeWorth. Investment banking declined due to the strong performance in the prior quarter, seasonally lower client activity this quarter, and transaction timing. Year-to-date investment banking income is up 14% with syndicated finance, M&A, and equity offerings being the primary drivers of growth. Trust and investment management income was down $23 million sequentially, however, RidgeWorth represented $31 million of the decline. And our core private wealth business grew $8 million. Mortgage production income was down $7 million quarter-over-quarter as gain on sale margins declined slightly. Closed loan production increased 11% while applications declined 4%, reflecting the return to more normal seasonal patterns in the mortgage business. Retail investment services and card fees continue to be on a positive track as the result of our ongoing focus on meeting more clients’ needs. In addition, service charges for deposits increased $9 million, partially driven by seasonal trends. Other non-interest income, excluding the gain on sale of RidgeWorth, declined $13 million as a $41 million gain related to the $2 billion sale of government guaranteed mortgages was negated by a $49 million impairment of a leasing portfolio due to market-driven declines in residual values of certain assets. Lastly, we incurred $9 million of net securities losses in the quarter due to a minor repositioning of the investment portfolio. Compared to the third quarter of last year, adjusted non-interest income increased $40 million driven by higher mortgage servicing income. Finally, to echo Bill’s previous comment, year-to-date non-interest income, ex RidgeWorth and mortgage-related revenues, was up 7% year-over-year, which reflects the positive momentum we are creating in our CIB business, as well as retail investment services, core private wealth, and credit card. Moving on to expenses, adjusted non-interest expense declined $71 million or 5% relative to the prior quarter. Personnel expense was down $33 million sequentially, driven by the sale of RidgeWorth, a reduction in FTEs and lower benefits costs. In addition, other non-interest expense declined by $36 million, in part due to severance and other costs in the prior quarter. Adjusted cyclical costs declined $13 million from the prior quarter, primarily driven by lower operating losses, which, as you know, can be highly variable. Going forward, we do not anticipate cyclical costs to be a meaningful driver of changes in our expense base with the exception of occasional volatility in operating losses. Compared to the prior year, adjusted non-interest expense was down $44 million or 3%, driven by lower cyclical costs and broad-based reductions across most expense categories as a result of ongoing efficiency initiatives. These reductions were partially offset by higher personnel expenses due primarily to an incentive accrual reduction booked in the third quarter of last year. As you can see on slide 8, our adjusted tangible efficiency ratio improved to 61.9% from 63.6% in the prior quarter as the $71 million decline in adjusted expenses offset the sequential revenue decline. This brings our year-to-date adjusted tangible efficiency ratio to 63.5%, a full 150 basis points lower than the same period last year despite an approximately $200 million decline in core mortgage production income. We are on track to meet our commitment to an efficiency ratio of better than 64% for the full-year 2014, and we continue to make progress toward our long-term target of sub-60%. Turning to asset quality on slide 9, our credit quality performance has been strong and we took proactive steps to make even further improvements in the third quarter. Non-performing loans declined 15% sequentially and 27% year-over-year, driven primarily by targeted reductions in the residential loan portfolio. We took a small additional charge-off and moved $53 million of non-performing mortgage loans to held-for-sale status in anticipation of a sale in the fourth quarter. Despite the substantial 15% reduction in the non-performing loan portfolio, the net charge-off ratio increased only modestly to 39 basis points, reflective of continued strong core performance within the loan portfolio. The improvements in asset quality led to a $35 million decline in the allowance and 6 basis point reduction in the allowance ratio while the provision expense increased $20 million sequentially given the modest increase in net charge-offs. Over the near term, we expect further though moderating declines in non-performing loans primarily driven by the residential portfolio. We also expect our loan loss provision expense to be fairly stable over the next few quarters, in line with our results for the past five quarters as continued strong asset quality may offset positive loan growth. However, as you all are well aware, the ultimate level of reserves and provision expense will be determined by future economic conditions and our rigorous quarterly review processing. Turning to balance sheet trends on slide 10, period-end loan growth was up 2% sequentially. We view the period-end comparison as a more accurate picture of our core loan growth in the quarter as it removes the impact of the $2 billion loan transferred to held-for-sale last quarter. Growth was driven by the C&I, CRE and consumer portfolios, and was partially offset by a slight decline in the residential mortgage and home equity portfolios. C&I loan growth was broad based and driven by not-for-profit and government clients alongside increases across almost all CIB industry verticals. CRE momentum continued this quarter due to growth in our institutional business, success in our REIT platform and a small portfolio acquisition. Consumer loans were also up nicely given growth in our consumer direct, indirect and credit card portfolios. We are pleased with our progress this quarter and believe that it’s consistent with our multi-year effort to optimize the balance sheet and add diversification by growing high-quality commercial and consumer loans. During the quarter, we completed the $2 billion government guaranteed residential mortgage loan sale and recorded a corresponding $41 million pre-tax gain. The proceeds of the sale were reinvested into level-one high-quality liquid securities to help us meet the liquidity coverage ratio requirements. As of September 30, our liquidity coverage ratio already surpasses the January 1, 2016 90% requirement. Therefore, we expect any further actions we take regarding the LCR will not be material to our earnings or balance sheet profile. On a year-over-year basis, average performing loans increased $8.3 billion or 7% driven by broad-based growth across most portfolios. This performance is reflective of our execution of certain growth initiatives alongside generally improving economic conditions in our markets. Turning now to deposit performance, average client deposits were up approximately $2 billion or 1% compared to the prior quarter and 4% compared to the prior year as good growth and low cost deposits was partially offset by time deposit run-off. This continued favorable shift in the deposit mix helped reduce interest-bearing deposit costs by 2 and 6 basis points compared to the prior quarter and prior year, respectively. Slide 12 provides an update on our capital position. Common Equity Tier 1 expanded by approximately $250 million as a result of growth in retained earnings while the estimated Basel III Common Equity Tier 1 ratio remained stable at 9.7%. Tangible book value per share increased 2% from the prior quarter and a full 11% compared to the prior year due to growth in retained earnings. During the quarter, we purchased $215 million in common stock, which includes the $130 million one-time buyback we completed upon receiving a non-objection from the Federal Reserve. In addition, we anticipate repurchasing approximately $230 million of stock over the next two quarters. Lastly, I’d like to highlight the credit rating upgrade we received from Standard & Poor’s this week, which acknowledged the actions we have taken as an organization to substantially improve our asset quality position, increase our capital ratios, and enhance our profitability profile over the last several years. With that, I’ll now turn things back over to Bill to cover our business segment performance.

[Bill Rogers:]

Okay. Thanks, Aleem. On a segment basis, we continue to make progress, balancing expense discipline with the opportunities to continue to invest for future growth. So go to slide 13, in our consumer and private wealth segment this quarter, we saw solid returns on our recent investments and continued to show good revenue momentum both in our wealth management and lending-related businesses. Looking at the numbers, net income grew 17% sequentially, but was down 5% year-over-year as a result of higher provision and expenses. The combination of moderating asset quality improvement and incremental balance sheet growth drove the higher provision, and higher expense base reflected increased hiring related to revenue-generating positions in addition to elevated environmental operating losses. Relative to both periods, continued revenue momentum was a key driver of our performance as revenues were up 3% sequentially and year-over-year. The growth was balanced between net interest income and fee income, the latter of which saw positive trends in trust and investment management, retail investment services and deposit fees. Consumer loan production was up 23% year-over-year led by continued momentum in our consumer direct, credit card and indirect auto portfolios which more than offset the run-off in home equity and guaranteed student loans. Our success in consumer direct and credit card in particular demonstrates our focus on driving growth in higher risk-adjusted return businesses. The growth in the consumer direct portfolio has been driven by distinct lending platforms we have developed that are efficient, high-end customer satisfaction and a good credit quality with average FICO scores north of 750. Average client deposits were up 1% sequentially reflecting our enhanced focus on meeting more of our clients’ deposit needs. We expect more recent investments in technology such as the digital banking platform and SummitView, our well-received financial planning and account aggregation tools to further improve our deposit gathering capabilities. The big picture, we continue to focus on investing in digital, improving our deposit momentum and driving revenue growth opportunities to help offset headwinds associated with the prolonged low rate environment. Expense discipline, however, is also a key contributor to achieving our strategic objectives in this segment and we continue to balance cost reduction opportunities with prudent investments for further growth. Our wholesale segment continues to be a key growth engine for the company and although there are a few puts and takes to the numbers this quarter, the core trends remained strong. Looking at the numbers on an adjusted basis, net income was up 5% sequentially and 23% year-over-year driven by continued revenue momentum and strong asset quality. Adjusted revenue declined slightly from last quarter but grew 5% relative to the prior year. Net interest income was up relative to both periods driven by loan and deposit growth but this was partially offset by decline in loan yields. Non-interest income, particularly investment banking and trading income, accounted for the sequential decline as this business is subject to quarterly fluctuations based on transaction timings and market conditions. On a year-to-date basis, investment banking income was up 14% and trading income was up 12%, reflecting the investments we’ve made in talent and capabilities and our increasing market share. Average loan balances grew 4% from the prior quarter led by broad-based growth throughout wholesale’s client segments, most notably, as Aleem noted, the energy practice group, not-for-profit and government group, and CRE. In addition, we benefited from solid growth in our asset securitization and asset-based lending products and our national corporate banking expansion continue to gain traction. Loan yields remain under pressure, constraining our margin in this segment. However, as we’ve said before, we take a holistic view of our client relationships with deposit and fee generation also playing a role in our risk-adjusted returns. And in that light, year-to-date deposits are up 10% and capital market related fee income is up 13%. Across the platform, our markets remain competitive but our wholesale value proposition continues to be well received by clients. Where we choose to compete, we continue to win share. Lower loan yields will continue to be a challenge, and we’re working hard to mitigate that impact by being more disciplined about utilization of the balance sheet in addition to continuing to expand our fee income and deposit opportunities, particularly with our commercial clients. So, looking forward, our investment banking backlog and lending pipelines are healthy and we remain bullish on the overall growth and profitability outlook for this segment. Our mortgage segment continued to show steady progress quarter-to-quarter. This was the third consecutive quarter of core profitability for this segment with adjusted net income of $18 million, which was down sequentially due to lower production revenue and a gain-on-sale of loans in the prior quarter, along with higher charge-offs associated with the aforementioned targeted reductions in our NPL portfolio. A key driver of our improved profitability in this business has been strong expense discipline evidenced by an 11% sequential and a 34% year-over-year reduction in our core cost base. The revenue environment here remains challenging with industry origination volumes 15% lower than what, I think, we all expected at the beginning of the year and roughly 50% lower than the 10-year average prior to 2014. While the market is supported by good overall affordability, lower inventory levels, building activity and the amount of first-time home-buying continue to dampen total origination volumes. So for our part, we continue to invest and performing mortgage servicing as we both have the capability and capacity to grow this business. In the quarter, we added approximately $4 billion to our servicing portfolio through a combination of outright purchases and agency loan production. Looking forward, we expect to settle and transfer approximately $10 billion of additional servicing over the coming couple of quarters. In addition, I want to highlight our progress on the efficiency side as the mortgage segment has been a large hurdle in achieving our overall corporate efficiency goals. In the quarter, our adjusted efficiency ratio improved further to just over 70%, which is in stark contrast to previous years where the business was running well north of a 100%. Our steady progress reflects our strategy of carefully managing our expense base, improving our risk profile, particularly until the origination activity begins to normalize. So before I wrap up, I’d like to give a brief mention of our announcement last month regarding the naming of the new ballpark for the Atlanta Braves, which is set to open in 2017. This is part of a mixed use year-round facility that will feature office, residential and retail development and it’s a unique opportunity to improve our brand recognition both regionally and nationally. So to summarize the quarter, our performance demonstrated solid momentum across each of our businesses with a mix of revenue momentum in certain areas combined with good expense discipline in others, the net of which was further improvement in our overall efficiency. The economies in our markets continue to track positively and we’re committed to investing in our teammates and businesses such that we’re delivering on our purpose of lighting the way to financial well being for our clients, our communities, and our shareholders. So with that said, let me turn it back over to you, Ankur, for Q&A.

[Ankur Vyas:]

Great. Christine, we’re now ready to begin the Q&A portion of the call. As we do so, I’d like to ask all 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:]

(Operator Instructions) The first question comes from Ken Usdin with Jefferies. You may ask your question.

[Ken Usdin - Jefferies:]

Aleem, I just wonder if you could -- you guys had a great expense result this quarter, certainly helped by RidgeWorth. You had been talking about a 1.3, 1.4 type range. Certainly this number puts you below it from here. And Bill, I heard your point about getting below the 64% for the year, but just relative to that really good expense print and then expectations going forward, are we in a new range or was this an anomaly?

[Bill Rogers:]

I think it’s a little bit of both, Ken. This is a little bit of an anomaly which sort of demonstrates how we’re working hard to make sure that we really improve the overall efficiency ratio of the company. If you think about quarters where we’ve had revenue growth, you’ve seen some expense growth. In the quarter now where you saw some revenue decline, you saw an expense decline. Now, it won’t always track that way. We can’t guarantee a 100% correlation, but in general, we’re really trying to pull the levers we think are appropriate to match the opportunities that we see in our markets. Having said that, I do think that the 1.3 to 1.4 range that I had referenced in the past, I could probably tighten that up a little bit, I’d probably start thinking about that next year as perhaps in the 1.3 to 1.35 range, bring that top-end down a little as the expense efforts that we’ve been working on over the last several years are actually paying off.

[Ken Usdin - Jefferies:]

Okay, and my follow-up just then, so in the third quarter itself, the seasonal declines off of investment banking, what points would you make that were kind of better than normal I guess would be the question?

[Bill Rogers:]

If you are talking about investment banking, I would think about the third quarter as being sort of typically a lighter quarter in investment banking anyway, and we did see some transactions move timing from third quarter to fourth quarter. As we think about investment banking now looking at the fourth quarter, we’re feeling pretty good. Our pipeline right now was looking pretty strong. I’m not really sure what any actions would result as a result of this week’s market actions, but coming into this week, I think we’re feeling pretty good about how the fourth quarter is going to look for that business.

[Operator:]

The next question comes from Matt O'Connor with Deutsche Bank. You may ask your question.

[Matt O'Connor - Deutsche Bank:]

Just on the topic of loan growth, yours remains pretty good versus peers and I guess I'm looking at the year-over-year and thinking about ex some of the sales you had running maybe around 8%. Some of your peers have talked about pulling back a bit just as pricing has compressed and some areas like leverage lending may not be as appealing as it was before. So just your thoughts on the competitive landscape and do you think you can continue to outgrow the overall industry going forward?

[Bill Rogers:]

Matt, we’ve seen good opportunities which I think are reflective of a number of things. One is various investments that we’ve made in our business and the capacity that we’ve built ranging from industry verticals to national corporate expansion to CRE. Our markets, regional markets, I think, are performing better. So I think that’s somewhat reflective also of what’s happening. We’ve got capacity in areas like CRE where we started from a much smaller base, so we’ve got capacity to grow in that business. I would say similarly to what others have said, as you know, we’re going to be cautious and smart and where we see deals that don’t make sense, we’re certainly backing away from. But we’ve also built a lot of fee-generating capabilities such that on a deal-by-deal basis, we may be able to rate rock a little bit better because we’ve got an ability to put more fees over that opportunity and as you continue to see our improving return, we’re going to want to keep a high focus on that.

[Matt O'Connor - Deutsche Bank:]

Okay. And then just separately, as we think about the net interest margin beyond the fourth quarter, there were some disclosures in the appendix on the swap income being higher than what you had disclosed I think last quarter. Of course, loan spreads I think are directionally still coming in and rates are an unknown. Just any thoughts on where the NIM might bottom as we look out beyond 4Q?

[Aleem Gillani:]

Yes, Matt. If I think about what 2015 might look like, and given what we’ve seen in the markets so far, it’s a little early to say for all of ’15, but as a general range, if I think about where 2015 might go on NIM, I’d be thinking about it perhaps full-year NIM on the order of 290 plus or minus with some risks and opportunities on either side of that depending on commercial loan spread compression, how the interest rate environment does overall, what the Fed decides to do, and of course what we do in terms of swaps and I’ll remind you on swaps, all these are are turning floating rate loans into fixed-rate loans. So that’s all they do, and we generate new floating rate loans every quarter. So, in the context of the overall macroeconomic environment as we’re thinking about our balance sheet duration, if we have certain duration targets, we’ll be needing to put some swaps on every quarter just to match the new floating rate loans that are coming on. So, you’ve seen us take actions in the past several quarters on that book. I wouldn’t really think about that book as being a thing by itself, NII by itself. It really - the swap activities that we have are just in order to use derivative products to manage our overall interest rate risk profile and the duration of our balance sheet and the actions that we’ve taken have helped to grow NII and as long as we continue to get loan growth, we’ll continue to be doing more of that.

[Matt O'Connor - Deutsche Bank:]

And the 290 thought for the full year on average, would that include any impact from higher short-term interest rates?

[Aleem Gillani:]

Actually, our forecast right now, Matt, is that we won’t get a short-term rate increase in 2015. We’ve been thinking that for a little while with our anticipated first rate rise coming in early ’16 and we continue to have that view.

[Operator:]

The next question comes from Ryan Nash with Goldman Sachs. You may ask your question.

[Ryan Nash - Goldman Sachs:]

Just as a follow-up to that question, can you maybe run us through the changes that you made to the swap portfolio, how does it change the maturity profile, what does it do to the rate sensitivity and how far does the duration extend beyond 2015?

[Aleem Gillani:]

Yes, Ryan, the new swaps that we’ve put on in the quarter again were done essentially to match what we’re seeing in our commercial loan book and we added a few billion dollars of sort of three and four year swaps. It doesn’t really change the duration profile of the swap book much. If you think about our overall swap book, we had a duration there in that three to four year range anyway. So it doesn’t change the profile there, and it had the effect of adding sort of $10 million to $12 million or so per quarter in net interest income starting in 2015, starting in Q1 2015.

[Ryan Nash - Goldman Sachs:]

Got it. And then maybe for Bill, when I think about the progress that you guys have made on the efficiency ratio, so you're below 62% for this quarter. You've added some swaps to reduce some of the NII headwind that you have as you move into next year. So I guess you guys have obviously committed to having continued improvement, but I'm just trying to think about the magnitude. I know there are some puts and takes on a quarterly basis, but can we think about this as a good starting point for 2015 or is there too much seasonality in the business that we should think about more as a year-over-year change?

[Bill Rogers:]

I think there is too much seasonality to sort of pick one quarter a high or low and say that’s the starting point for future. We’re averaging 63.5% for the year. I’m confident and barring anything crazy and [indiscernible] got you rethinking about anything crazy, but I’m confident we’ll be under 64% for the year, and we’ll, as the end of the year progresses and we start to think about next year, we’ll give more guidance as to the efficiency ratio for 2015 but suffice it to say it will be below 64%. So we’re going to continue to trend down, that’s the commitment we’ve made. The speed at which we commit to trend down will be dependent upon a lot of things, not the least of which is interest rate environment and our expectations of an interest rate increase on the short-term side, but the net is we’re going to continue to, on average, trend down.

[Operator:]

The next question comes from Betsy Graseck with Morgan Stanley. You may ask your question.

[Betsy Graseck - Morgan Stanley:]

Hey, I just wanted to dig in a little bit into the expansion that you've been announcing and executing on recently in the commercial space, Chicago, Boston, Dallas, et cetera. Get a sense as to, A, how you are finding it. I know it's small dollars, but just wanted to get a sense of that, what else is on the docket to expand and how those expansions have been doing relative to plan in terms of revenue growth, et cetera?

[Bill Rogers:]

I think you accurately pointed sort of small now, but relative to plan we’re tracking ahead of where we were relative to plan. A couple of banks I’ve been really pleased with the quality of the talent that we’ve been able to attract for those offices. So it’s a good confirmation that people like our platform, they like what we’re doing and they want to be a part of it. So that is probably maybe exceeded my expectations and they were really high to start with. In terms of the business that we’re attracting, similarly I think we’ve been real pleased with the quality of what we’re putting on. As you said, it will sort of start slower, it will tend to be -- start a little more asset side and then fee income will follow so that will be a sequence, that will be pretty natural in that progress. But everything we’re seeing to-date, I feel good about and we’re tracking ahead of where we thought we were internally both from a talent side, asset growth side, and most importantly, returns side.

[Betsy Graseck - Morgan Stanley:]

And how are you getting into the new clients? I mean obviously assets first. So maybe you could speak to the pricing versus structure type of debate that's out there.

[Bill Rogers:]

I think we’re leading with advice, so we’re leading with advice and knowledge, and we’re not leading with pricing and structure. Price and structure is somewhat market dependent, but we’re leading with advice, and so the way we’re getting into clients and attracting new situations is bring in the knowledge base that we’ve developed from our industry verticals, the product capacity that we’ve developed on our platform and adding an additional bank to situations. We’re not always starting on the left side. You’re going to start on the right side and work your way to the left. But it’s really leading with advice and skill versus price and structure.

[Betsy Graseck - Morgan Stanley:]

Can I just ask one bigger picture follow-up, is energy -- energy industry has been an important driver of CapEx spend in the U.S. obviously and in some of the institutions, loan growth in C&I and/or sometimes in CRE, but I just wanted to get a sense with oil now priced where it is, do you see any potential pullback in that and if so, if there are other industries that you see an opportunity for expansion of things like CapEx?

[Bill Rogers:]

I mean that’s clearly one that we’re watching. The good news is that energy has been a good part of our growth but it’s not sort of the only part of our growth. This quarter actually was quite good on the energy side, but it’s one that we’re going to watch and be careful about and the pundits are sort of all over the place on how much additional capital will be there, but our portfolio is good so I feel positive about that where we are. Might it have slower growth in the next several quarters relative to last few quarters possibly, but that’s not sort of the only driver for us. And the fee income side, I view this as potential. I mean anytime you have little volatility, I think if you are on the advice business, you’ve got more opportunities on the fee side.

[Aleem Gillani:]

Betsy, I think there is a little geopolitical aspect to this also as center of energy production in the world moves from the Middle East into the U.S., we’re poised well to be able to take advantage of that and we continue to have optimism about the energy sector overall.

[Betsy Graseck - Morgan Stanley:]

Okay, no, that's helpful. Just interesting, as the breakeven points come down, just wondering if you're seeing any pullback near term on reinvestment, but it sounds like at this stage not. So I appreciate the color.

[Bill Rogers:]

I think it’s too early to tell right now.

[Operator:]

The next question comes from John Pancari with Evercore. You may ask your question.

[John Pancari - Evercore Partners:]

I want to see if you could give us more color on the other expense line in the third quarter, just how we should think about that. It pulled back pretty materially here and I know you had cited some discretionary items that drove that. So, I wanted to get an idea about could that balance or could that line item spring back next quarter just given the volatility of the items involved? Thanks.

[Aleem Gillani:]

John, I don’t know if I’d use the word spring back, but I do think that we had a couple of items in Q2 that make the Q3 number look like it’s dropped off. We did have a couple of discretionary items that showed up in Q2. Having said that, I would expect, as I think about next year, assuming revenue stays above where it is that we would see expenses in that sort of $1.3 billion to $1.35 billion range. If revenue falls, we’ll be pulling on expense levers to maintain efficiency, and if revenue goes up, then you might us - we might see expenses moving up towards the top end of that range, but as sort of a rough guidance for a range, I would think $1.3 billion to $1.35 billion looks right now for me to be a fair number for quarterly expenses next year.

[John Pancari - Evercore Partners:]

Okay, all right. And then on that point, can you just give us a little bit of detail on the expected impact to your pension expense for 2015 if rates remain where they are currently?

[Aleem Gillani:]

Our pension expense is actually right now negative because we’re running a fully-funded pension plan. So we happen to be in relatively good shape relative to, I think, the industry and Corporate America overall. I would expect, if yields drop, that you might see that the benefit we get from the plan come off a little and remember that our plan overall was frozen. So, given the frozen plan we’re running, we’re a little bit less sensitive to rates overall than perhaps others you would see.

[John Pancari - Evercore Partners:]

Okay, all right. And then one last very quick one. I wanted to see if you can give us the amount of loans currently tied up in the MetLife JV that you initiated last year and what are the current yields in that portfolio?

[Aleem Gillani:]

The total amount of loans that we’ve got is in the sort of $600 million to $700 million range, and I don’t have a yield number off the top of my head, but I would think about that whole structure as being not just yield driven, but also giving us the opportunity to talk with those clients, provide them expertise and start to incorporate those clients into our overall capital markets activities and help them in other parts of their requirements besides just providing funding.

[Bill Rogers:]

I think just to talk about that as a percent of our portfolio, it’s a small percent of portfolio. This was an important relationship to add diversity both geographic and product to our portfolio. These are very, very high quality, lower ROA absolutely than the balance of our portfolio, but the balance of our portfolio combined with this is tracking to be accretive to our ROA objectives.

[Operator:]

The next question comes from Erika Najarian with Bank of America. You may ask your question.

[Erika Najarian - Bank of America:]

So thanks for the color on sort of the tough mortgage revenue environment. However, a few of your peers have started to talk about just in the few days a pickup in refi applications and I was wondering if you could help us get a sense on what the upside to price could be to your production income if rates do stay this low through the end of the year?

[Bill Rogers:]

Yes, Erika, one robin doesn’t make a spring category. The last two days have been really good. Our locked volume and app volume was up 80% in two days, so very significant. I don’t know if that’s going to continue. I think we’ll have to sort of see things settle out a little bit, but I think you are accurate in pointing out that the risk is to the upside and how significant that upside will be. I’m not ready to quantify at this point. So we’ve got a couple of weeks under our belt and we are starting to see some normal activity, but certainly the early couple of days were really positive reads in the way that you’d expect. Will this be refinanced boomlet? I don’t know. Certainly a lot more conversation, we’ll look at our portfolio, we’ll determine how much marketing we want to do and how much spreads you have between what’s in the portfolio and where current rates are, and I think we’ve got good math and good diagnostics around that and we’ll figure it out. But I think the risk is to the upside, but I’m not sort of ready to commit to what that is yet till we get into a little bit more.

[Erika Najarian - Bank of America:]

And my second question is just a quick follow-up. On slide 19, thank you for providing us the swap schedule. I just wanted to ask a couple of things. One is that I assume that also includes the swaps that were recently put on in terms of your quarterly average four count for 2015 and as we think about how that tracks on a quarterly basis, is it $50 million each quarter or is there sort of more significant drop-offs that we should consider as we think about the quarterly earnings trajectory for next year?

[Aleem Gillani:]

Erika, that number does include all of our actions through the end of the quarter, through the end of the third quarter, and $50 million as a quarterly average is sort of roughly stable. So not exactly, you’ve got a few million swing here between one quarter and the next, but $50 million on average is a good and rough stable number for now. Again, I would remind you we’ve taken actions every quarter. If you go back and look at this slide for the last several quarters, you see that number going up consistently quarter after quarter. So, as long as we see opportunities and we continue to grow corporate lending, we will be required to add a few more swaps just in order to manage within our overall duration requirements set by our asset liability committee.

[Operator:]

The next question comes from Mike Mayo with CLSA. You may ask your question.

[Mike Mayo - CLSA:]

Hi, going back to efficiency, how much does the run-off of the swap portfolio hurt the efficiency ratio next year? And what I'm trying to get to is, if you take your $1.3 billion, $1.35 billion quarterly expense guidance off of this quarter's revenues of $2 billion, 1.3 billion times divided by 2 billion is a 64% efficiency ratio implied and if you take the higher end of your guidance, 1.35 billion, that's a 66% efficiency ratio based solely on this quarter's revenue. So that guidance implies 64% to 66% based on the quarter, but you said it should be lower than 64% next year. I just want to make sure I understand how you're thinking about this. And one other follow-up, you were at 62% this quarter and you're saying you'll be below 64% next year. So I just don't want to get too excited about the linked-quarter efficiency improvement if your guidance is for it to back up a little bit.

[Aleem Gillani:]

Thank you, Mike. I appreciate you not getting too excited about one quarter. One quarter really isn’t - any one quarter no matter whether it’s good or bad, really isn’t telling about sort of overall trends. However, you’ll recall at the start of this year in January when we gave guidance on efficiency ratio for this year and we said it would be below 64%, there was a little skepticism out there that we’d be able to achieve that. We’ve worked hard. We’ve done what we can on revenues. We’ve done what we can with clients. We’ve done what we can with expenses in order to achieve the number we committed to for this year and right now we think we’re on track to achieve the below-64% for this year. As we get to next year, we’ll set guidance for next year and our trend has been and our objective has been to continue to improve. So, as we develop, what we think, a good forecast is for next year, we’ll give you guidance in January as to what we think the efficiency ratio target for us ought to be next year, what we ought to be held accountable to and we’ll try to make that a more efficient target than we have this year and I would look for us to try to continue to improve this over time.

[Mike Mayo - CLSA:]

We look forward to the fourth-quarter guidance. One follow-up, one real simple question, even with the headwind from the run-off of the swap revenues, do you think that the efficiency in 2015 can be better than it is in 2014?

[Aleem Gillani:]

Today, if you are asking me for a yes or no answer, might be my answer will have to be yes. I think we can continue to make SunTrust a more efficient company over time.

[Bill Rogers:]

Mike, to confirm, two yeses on that, make sure I pile in on that, but that’s not to say it’s not going to be hard. This is a grind and this is lots of, at this point, pennies and nickels on the revenue side, pennies and nickels on the expense side, and a complete grind, but the objective, as we sit here right now, is for 2015 to be lower than 2014.

[Aleem Gillani:]

And Mike you pointed out it’s a $200 million revenue headwind we’re facing next year. So, that’s going to require us to work really hard to achieve that new target.

[Bill Rogers:]

And in fairness, that’s about equal to the revenue headwind we faced in mortgage in 2014 sort of coming into this year. We were able to overcome that. So that’s part of our confidence.

[Ankur Vyas:]

Christine, we have time for one more question.

[Operator:]

Thank you. The last question comes from Marty Mosby with Vining Sparks. You may ask your question.

[Marty Mosby - Vining Sparks:]

Thank you. Let's go back to that $200 million earnings hit from the swaps as you have already kind of given into the fact that you're adding some swaps here recently with growth. But as you've pushed your horizon for the rise in interest rates and the Fed funds rate not until 2016 and as we've seen in the long end of the curve, it's flattening, so we don't really feel like even when rates go up, you are going to see the long end go up too much. So re-rolling the swaps doesn't seem like a lot of risk if we're talking about such a benign interest rate rise over the next couple of years. So I know when you first talked about rolling them off, you thought rates were going up in ‘15. So is your attitude towards doing those things changing at this point?

[Aleem Gillani:]

I don’t know that I’d say Marty that our attitude overall is changing. Our ALCO meets regularly and sets for the company what we think are prudent interest rate risk targets and an overall duration for the balance sheet, and within that we try to manage our rate risk within the guidelines set by ALCO to maximize both current income as well as market value of equity of the whole company. So we are looking at this regularly, we are looking at it monthly. We’re taking advantage of either big changes in client behavior or changes in market behavior wherever we can and I think you’ve seen us over time demonstrate a little bit of an aptitude toward being able to do this well and as we continue to see opportunities and as our client business continues to grow, we’ll be taking advantage of both of those to manage our rate risk in total, one component of which is this book.

[Marty Mosby - Vining Sparks:]

Just one follow-up to that. How much in short-term rate rise do you need in your sense to breakeven to letting the swaps roll off? So is it 50 basis points, 100 basis points, 200 basis points? How much do you need to refill that hole?

[Aleem Gillani:]

Our overall asset sensitivity, as a company, is 3.9%. So, if we get 100 basis point parallel shift in rates, you’d see our net interest income climb by approximately 4% and that’s going to be about the kind of number that you see as a headwind for us next year.

[Marty Mosby - Vining Sparks:]

Got you. So the 100 basis points is what you're looking for to make up for what you're losing here?

[Aleem Gillani:]

At this time.

[Ankur Vyas:]

All right. Thank you everyone. This concludes our call. Thanks for joining us today, and if you have any further questions, please feel free to contact the Investor Relations department.

[Operator:]

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect at this time.