Solidion Technology Inc. (STI) Q3 2011 Earnings Report, Transcript and Summary

Welcome to the SunTrust Third Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the conference over to Mr. Kris Dickson, Director of Investor Relations. You may begin.

Thanks, Wendy, and good morning, everyone. Welcome to SunTrust Third Quarter Earnings Conference Call. Thanks for joining us. In addition to the press release, we've also provided a presentation that covers the topics we plan to address during our call today. The press release, presentation and detailed financial schedules are available on our website, www.suntrust.com. This information can be accessed by going to the Investor Relations section of the website. Discussing our earnings presentation today will be Bill Rogers, our President and Chief Executive Officer; and Aleem Gillani, our Chief Financial Officer. Also joining us today, among other members of our executive management team, are Tom Freeman, our Chief Risk Officer; C. T. Hill, our Head of Consumer Banking, and Mark Chancy, our Head of Wholesale Banking. Before we get started, I need to remind you 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 press release and SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures in talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website. 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. And with that, I'll turn the call over to Bill.

Thanks, Kris. I'll keep my introductory comments brief this morning and then let Aleem get right into the review of the quarter so we can get grounded in the numbers. I'll come back on afterwards and share my perspective before the Q&A. If you turn to Slide 3, I think that's a good summary of the quarter, and I'm pleased to report we have momentum in several key areas, fueled in part by our intense client-centric focus. Loans were up again this quarter with targeted portfolio growth exceeding planned declines in higher-risk categories. We continued to grow deposits with a favorable mix shift, and key credit quality metrics improved across-the-board. We are pursuing initiatives to help drive better performance over time, including, but not limited to, our expense reduction program. I'll revisit that topic later in the call. But first, let me turn it over to Aleem to provide some color on this quarter's financial results.

Thanks, Bill, and good morning, everybody. I'll begin my comments today with the summary income statement on Slide 4. I'll provide you greater detail into the primary performance drivers on subsequent slides. So for now, I'll just hit the highlights. Earnings per share this quarter were $0.39. That's a $0.06 per share increase from the second quarter, primarily due to a lower provision resulting from improved credit trends. Compared to the third quarter of last year, earnings per share increased $0.22. The largest drivers were higher net interest income, a lower provision and the elimination of the TARP drag. The improving profitability trends that we've reported over the past couple of years are evident in the year-to-date figures. 2011 earnings per share were $0.81, which obviously compares favorably to the net loss that we reported during the first 9 months of last year. If you'll turn to Slide 5, we'll drill down further into our performance beginning with net interest income and net interest margin trends. Third quarter net interest income increased sequentially by $7 million or 1%. This was due to an additional day during the third quarter and a decline in interest expense, which was primarily attributable to lower deposit rates and the continuation of the favorable deposit mix shift. The net interest margin decline of 4 basis points was consistent with our guidance and primarily driven by lower earning asset yields. Relative to the third quarter of last year, net interest income increased $27 million or 2%, and the margin increased 8 basis points. This was the result of a 29 basis point decline in interest-bearing liability costs due to favorable deposit trends and a reduction in longer-term debt. This benefit more than offset the 17 basis point decline in earning asset -- in interest-earning asset yields due to lower rates. On a year-to-date basis, net interest income increased 5%, again due primarily to lower liability costs. As we look to the fourth quarter, particularly in light of the low rate environment, we expect a similar decline in the net interest margin to that experienced in the third quarter. Let's turn to noninterest income on Slide 6. As in previous quarters, we have made certain adjustments to our noninterest income for items like securities gains and mark-to-market impacts, and the details of these adjustments are included within the appendix. The major components of this quarter's $63 million adjustment included $78 million in valuation gains that were recognized on the company's fair value debt and index-linked CDs, partially offset by $21 million in valuation losses on previously secured securitized loans and illiquid securities. On an adjusted basis, noninterest income declined by $21 million this quarter. Investment Banking revenue was down $27 million, coming off a high second quarter as transaction volume decreased in light of the market volatility. That same market volatility in August also resulted in somewhat lower core trading revenue. Mortgage production income was up by $37 million this quarter on an adjusted basis. Core production income rose by about $65 million as a result of increased origination volume as well as wider margins. Partially offsetting this was $27 million of higher mortgage repurchase costs, which I'll discuss in more detail momentarily. Notwithstanding the stronger sequential quarter mortgage performance, mortgage-related revenue was lower than the third quarter last year when we saw extremely high levels of refinance volume, as well as very strong MSR hedge performance. These were the primary drivers of the approximate $200 million decline in adjusted noninterest income from a year ago. On a year-to-date basis, noninterest income was stable with 2010 levels. Double-digit growth in core consumer and commercial fee categories like Investment Banking, card fees and retail investment services was offset by lower mortgage revenue, as well as lower deposit service charges due to Reg E. As you are aware, our debit interchange revenue will decline beginning in the fourth quarter. As mentioned last quarter, we expect about a 50% reduction, which equates to approximately $45 million to $50 million per quarter. We continue to expect to mitigate about 50% of the approximate $300 million combined annual revenue reductions from Reg E and debit interchange. Most of that mitigation should be in the run rate by early 2012, with the balance late in 2012 and in 2013. Let's turn to Slide 7 for a discussion on mortgage repurchase trends. As shown in the top left portion of the slide, new repurchase demands increased to $440 million during the quarter with the 2007 vintage continuing to be the largest component. Demands remained difficult to predict and they were elevated this quarter, which is a trend that may continue in the fourth quarter. As you can see in the bottom row of the table, almost all of the demand this quarter were agency related. The top right part of the page shows that pending demands ended the quarter at $490 million. That's up only modestly from the prior quarter despite the increase in new demands as we worked hard to actively resolving these issues. You can see evidence of this in the bottom left portion of the page as charge-offs increased from second quarter levels. This was largely expected as a significant portion of last quarter's new demands came late in the month of June, thus driving up the second quarter pending population. As such and despite the fact that charge-offs declined that quarter, we had built the second quarter reserve in anticipation of this quarter's increase in resolutions. As the losses were recognized, we were able to utilize a portion of that reserve increase. The mortgage repurchase provision during the third quarter was $117 million, and the ending reserve level was $282 million. Let's take a look at expenses now. Expenses increased by $18 million or 1% on a sequential-quarter basis due to mortgage-related costs. Specifically, operating losses and credit and collections expense were up a combined $19 million. Other expense line items were essentially stable. Relative to the prior year, adjusted noninterest expense increased by $74 million. Operating losses increased by $45 million, largely attributable to mortgage servicing. Employee compensation was the other major driver, up $41 million, due to staff additions in client interfacing and mortgage loss mitigation and servicing roles. Higher incentive compensation due to improved revenue in certain businesses also contributed to this increase. Partially offsetting this was a $15 million decline in other real estate expense. And as Bill mentioned, he will provide you an update to our expense program later in the call. Let's move on to the balance sheet, starting on Slide 9. Average performing loans increased by over $1 billion or about 1% from the prior quarter. Growth was driven by targeted loan categories, including C&I and consumer loans, while higher risk elements of the portfolio continued to be managed down. Commercial loan growth came from the C&I category, which increased by $1.1 billion or almost 2.5%, primarily driven by our large book of borrowers. The growth was across multiple industries, mostly in the form of increased term funding. We saw a modest increase in large corporate utilization rates and a similar increase in commitment levels for our smaller commercial clients. Growth within consumer was across all loan categories with the largest dollar increases in guaranteed student loans and indirect auto. Period-end loans were up over $2.5 billion or more than 2% from the prior quarter. Notable items included increased production volume, higher loan balances during every month of the quarter and the $500 million student loan portfolio acquisition that closed at quarter end. Relative to the prior year, average loans grew almost $3.5 billion or about 3%. This growth also came from the targeted C&I and consumer portfolios. Commercial category loans increased by about $0.5 billion as strong C&I growth more than offset declines in CRE and commercial construction. The consumer portfolio was up by approximately $3.5 billion with student and indirect auto again driving the growth. Conversely, residential loans declined due to about a $2 billion combined reduction in non-guaranteed mortgages, home equity and residential construction, partially offset by growth in guaranteed mortgage. Overall, we are pleased with our traction in growing selected areas of the portfolio this quarter. And currently, we were also able to continue to reduce risks, and further information of this is shown on Slide 10. The portfolios that we've categorized as higher risk have accounted for about 50% of our net charge-offs over the past couple of years. As may be seen on this slide, these balances are down by almost $13 billion or about 55% since the fourth quarter of 2008. These portfolios fell by another $700 million this quarter with declines across all the categories, especially the commercial construction and higher-risk home equity portfolios. Overall, these higher-risk portfolios now constitute only 9% of our total loans. Less than $1 billion of this is nonperforming and has been written down or reserved for while the remainder of the book is exhibiting more favorable characteristics. For example, the performing higher-risk home equity portfolio has a refreshed averages FICO score in excess of 700. At the same time that we've been managing these high-risk balances down, we've also been reducing our risk further by increasing our government-guaranteed loans. Government-guaranteed loans increased this quarter by about $650 million. And they now total $9.8 billion or 8% of our loan portfolio. Let's move on now to a discussion on deposits. Average client deposits were up again, increasing by over $1 billion or about 1% from the second quarter. Favorable mix shift continued as growth was again concentrated in lower-cost categories, most notably via the $2.1 billion or 7% single quarter increase in DDA balances. Time deposits were down, and we also saw a decline in NOW balances, many of which migrated into DDA. Relative to the prior year, average deposits were up $5.7 billion or about 5%. Lower-cost deposit accounts increased by about $10 billion, which primarily came from 20% growth in DDA and 8% growth in money market. And currently, higher-cost time deposits declined by about $4 billion or 17%. Moving on to credit quality. All of our primary asset quality metrics improved this quarter, largely due to favorable trends in the commercial portfolio. Early-stage delinquencies, excluding government-guaranteed loans, declined 3 basis points from the prior quarter. Commercial loan delinquencies were down 7 basis points while residential loans improved by a modest 2 basis points. You can see this detail in the Appendix where we've provided you the usual supplementary slides. Commercial and consumer early-stage delinquency rates of 15 and 67 basis points, respectively, are at relatively low levels. So we expect any further improvements in overall delinquencies to be driven by residential loans and to be influenced by the overall economy, particularly by changes in unemployment, and to a lesser extent, home value. We saw another quarter of meaningful improvement in nonperforming loans and nonperforming assets, which were down 10% and 8%, respectively. I'll share with you the drivers of this momentarily. Net charge-offs were $492 million. This was a 3% improvement from the prior quarter and consistent with our prior guidance. In light of the overall continued credit quality improvement and risk reduction in the portfolio, we decreased the allowance for loan and lease losses by $144 million this quarter. The allowance ended the quarter at 2.22% of loans. Of note, if you exclude government-guaranteed loans from the denominator, this ratio is about 20 basis points higher. Slide 13 provides some additional detail on nonperforming loan and net charge-offs [ph]. Sequential quarter decline in nonperforming loans marked their ninth consecutive quarterly decrease and was driven by commercial loans. Commercial construction NPLs fell $242 million or almost 40% as the result of continuing risk-mitigation activities. C&I and CRE NPLs declined by almost $60 million each or over 10%. Nonperforming residential loans were essentially unchanged. Relative to the prior year, nonperforming loans declined by $1.1 billion or 26%. Every loan category was down with the largest dollar declines coming from commercial construction, non-guaranteed mortgages and C&I. Net charge-offs declined by $13 million from the prior quarter, driven by residential loans as home equity and residential construction fell by a combined $17 million. Commercial charge-offs were relatively stable as an approximate $40 million sequential quarter increase in commercial construction was largely offset by about a $35 million combined decrease in C&I and CRE. Compared to last year, net charge-offs were down by about $200 million or about 30%, which was driven primarily by lower residential losses, most notably in the non-guaranteed mortgage loan category. Overall, NPL declines in recent quarters have been driven by commercial category loans as the higher-risk commercial construction portfolio has been reduced while the C&I book has generally performed well overall. Residential loans have been the largest driver of our lower net charge-offs. This portfolio has seen notable improvements over the past year, although that stabilized somewhat this quarter. Taking this together, we expect the third quarter trends to be similar in the fourth quarter, specifically additional declines in nonperforming loans with generally stable net charge-offs. I'll conclude my comments today on Slide 14 with the discussion of capital. The Tier 1 common ratio expanded to an estimated 9.25% while the Tier 1 capital ratio ended the quarter at an estimated 11.05%. The latter was down marginally due to a modest reduction in our outstanding trust preferred securities, as well as the impact of loan growth on risk-weighted assets. Both of these ratios continue to be well above the current and proposed regulatory requirement. The tangible common equity ratio expanded by over 30 basis points due to higher retained earnings, as well as an increase in accumulated other comprehensive income due to higher unrealized gains in our securities portfolio. Those same factors drove a 4% increase in tangible book value per share, which ended the quarter at $25.60. We told you on the last call that we intended to approach our Board requesting a modest dividend -- a common dividend increase. We did so and received their approval. And we announced during the third quarter a 4% share -- a $0.04 per share increase in the quarterly dividend. Separately, we also repurchased and retired about 4 million SunTrust warrants during a public auction conducted by the U.S. Treasury. While both of these actions were relatively small, they are consistent with our desire to increase the return of capital to our shareholders. With that, and to lead us through a discussion of our strategic growth initiatives, I'll turn the call back over to Bill.

Great. Thanks, Aleem. I'm going to take us to Slide 15. And as we discussed before, we're pursuing specific strategies to drive higher profitability and growth from a more diversified platform. I think this slide shows 3 of the 4 main categories and provides some examples of the success we've already garnered. The fourth category, improved expense efficiency, will be covered on the subsequent slide. While there are certainly more to come on each of these fronts, I wanted to provide some data points to demonstrate the momentum we're generating. There are several interrelated components to our strategy for growing consumer market and wallet share. Most importantly, the initiatives are grounded in our ability to win by providing the best service to drive improved client loyalty and better relationship penetration. We believe this is a critical means of differentiating ourselves in the market place and is resonating well with our clients on a very broad basis. As you heard earlier, evidence of this is showing up in absolute deposit growth as DDA balances are up 7% over the prior quarter. Lower-cost deposit increases more than offset the decline in higher-cost deposits, maintaining our favorable mix shift. A relative growth, however, was evidenced in the recent FDIC deposit share data as we increased share in 8 of our top MSAs. Last quarter, I indicated that we were beginning the planning for our new checking product suite. This was the result of extensive client research and is now in full implementation mode. We discontinued free checking and introduced our new Everyday Checking product. Everyday Checking carries a monthly maintenance fee, which can be waived by holding a $500 daily balance or by simply having a direct deposit into the account. Everyday Checking also has a monthly check card fee for unlimited check card usage, which is assessed only when the card is used on a monthly cycle at the point of sale. Now as was expected, we're opening fewer accounts. However, the average balance of the new accounts are twice as high as those opened under free checking. We're also seeing triple digit growth in the sale of our higher tier accounts, which require higher balances and a greater breadth of relationship with SunTrust. So on various fronts, this conversion is meeting or exceeding our expectations. Another strategic priority is better diversification of our loan portfolio. Our C&I and consumer books grew by combined $7 billion over the last year. More importantly, production in C&I and consumer were particularly strong this quarter, and we saw some improvement in utilization in large corporate and an increase in total commitments in core commercial. Our guaranteed portfolios, both residential and student, have also been growing and contributing to both our diversification and risk improvement. All this growth more than offset the targeted reductions in our non-guaranteed residential loans, which are down $2 billion since the third quarter of last year, including a $1 billion decline in home equity. So overall good progress toward this objective as well. A better diversification also applies to our business mix and fee income. Expanding wholesale business is a key strategic element in this priority, and we generated significant momentum on this front. While the third quarter was impacted by an industry-wide decline in capital markets revenue, Corporate and Investment Banking year-to-date revenue was up 16% and net income was up 23%. Diversified Commercial Banking revenue is up 9% and net income is up 34%. Growing our private wealth business is also a priority and you see we've had some success here as well as retail service income was up almost 20%. Now moving onto our expense initiatives in Slide 16. So anticipating a tougher operating environment earlier this year, we embarked upon the development of a program to uncover additional ways to make significant and permanent expense reduction throughout the organization. As a result of those efforts, we announced to you last quarter our plans to eliminate $300 million in run rate expenses by the end of 2013. Today, I'd like to provide some more specificity around what we're doing to accomplish that goal. First, you'll notice that this program now has a name, which is the PPG Expense Initiative. PPG is an acronym for playbook for profitable growth. It's what we call the collection of initiatives across the organization that we believe, over time, will be a key component in our plan to reduce our efficiency ratio to under 60%. As you can imagine, there are numerous initiatives in place under this program, but for purposes of communicating our progress, we've categorized them into a few core buckets, which you can see depicted on the slide. As we move through the process, we'll be updating you on the status of these with increasing accuracy and transparency. The bar across the top of the page will be filled in overtime with real dollar progress towards our program goal. As we've previously stated, only a small portion of the savings will actually be realized in 2011 and as such the dollar impact of our efforts, thus far, has not been meaningful. We have, however, made significant progress on our overall plan and are in full implementation mode on several large and dozens of smaller initiatives. I'll remind you that the $300 million in expense reductions are above and beyond the expected credit-related expense and mortgage repurchase reserve normalization that undoubtedly will occur -- undoubtedly occur as the economic environment improves. The sub-60 efficiency ratio goal is the culmination of both the program and these expected normalizations. So let me move to some of the specific initiatives. So first, starting with the strategic supply management effort. That's focused on not only securing even more competitive pricing from our supply base, but also proactively further managing down our own demand and assessing value received for costs incurred. Nearly all outside spend areas are in scope and the entire enterprise is in the game. The broad categories for which we are providing status updates are: Discretionary spending, demand management and outsourcing. Immediate actions have been taken to further reduce expense in obvious discretionary areas. But more importantly, we're enhancing our engagement model focused on sustaining these new lower levels of spending. The next key component of the program is the consumer bank efficiencies initiatives, which includes channel optimization, alternative channel management and sales and service productivity. As we've articulated previously, we've made numerous investments in client-facing technology such as mobile and ATM enhancements, which have supported and enabled a meaningful shift in clients' willingness to use self-service channels. As clients utilize these channels, it allows us to evaluate other aspects of our consumer delivery model such as our branch network. This is not a widespread branch-reduction exercise, though it will include some branch rationalization and core changes to our branch staffing model. There are going to be increases in key opportunity branches, but overall, net reductions to reflect reduced transaction volume. The changes are underway, and we'll begin to see the results early next year. The objective is to accomplish this while maintaining the key momentum we've established in our industry-leading loyalty. Operations staff and support is the final of the 3 main categories of savings and includes our shared service initiatives along with digital technology and lean process design and management. Within our corporate operations, there will be strategic consolidation of certain areas where redundancies have been identified. Today, some aspects of our corporate functions are performed in multiple parts of our organization like corporate staff within the lines of business and/or within the geographic units. Our future model will use a more centralized approach for support functions with more centers of excellence while preserving our key local sales and service delivery model. We expect that this will enable us to perform functions like marketing, procurement, technology and human resources more efficiently and more effectively. We're also pursuing other opportunities such as standard reporting through all elements of the organization. Digital technology, in this case, refers to a set of initiatives designed to significantly increase both our internal and our clients' use of digital solutions. We're uncovering means of reducing the amount of printed material in our interactions with clients in the day-to-day operations of our branches and across the bank. It also includes efforts to improve adoption rates of our more robust digital solutions by our clients. While many of the initiatives are very specific like consolidations, redundancy eliminations and spans and layers analysis, we're also incorporating lean tools and technologies in to virtually the whole bank to boost productivity. We've had much success in using lean process principles in our technology and operations area to help drive large-scale transformational improvements. We plan to adopt these on a more widespread basis across more disciplines. As the PPG expense program progresses, we'll provide status updates on each of the major initiatives outlined on this slide along with the real dollars that are coming out of our expense base as they are realized. I want to assure you this program has my full attention, and I'm confident that we've built the resources and have the intensity to accomplish our objective. So in conclusion and before we open up the call for Q&A, I'll note that while our bottom line performance is not yet where we'd like it to be, progress is being made. Momentum is building around the initiatives we have in place to grow targeted businesses, better diversify the loan portfolio and reduce expenses. While the future may be a little less certain, virtually all of our asset quality metrics improved this quarter. Our client first mandate and focus on having a talented, highly engaged workforce is being recognized and rewarded by our clients. And all that's being done with an eye towards driving better return for our shareholders. I have great confidence we've got the right priorities in place. We have a great team leading our company. We have focused teammates working towards a common objective. Now before we turn it over to Q&A, I'd like to take a little liberty to thank the teammates who are on this call as they are what define SunTrust. So with that said, Kris, let me hand it back over to you, and we'll start the Q&A

Thanks, Bill. When we're ready to open up the call for Q&A, I'd like to ask the participants to please limit yourself to one primary question, followed by one follow-up.

[Operator Instructions] Our first question today is from Marty Mosby with Guggenheim Partners.

A question I wanted to focus on was really the credit-related expenses. And what we've seen the last 2 quarters is that number kind of moving back up and kind of this quarter we picked our head back above $200 million. Was just curious if as we saw the DVA [ph] coming in and we had some positive movement on that side if we didn't see some opportunity to kind of make sure we were working real hard to get some of these things behind us as we go on through the quarter.

Marty, it's Aleem. Yes, we're actually working very hard to do that and you, I think, saw a little bit of that happening this quarter. We've got a team of people, particularly on the mortgage side and on the putback side working to see how many of those demands that come in we're able to refute, working very hard to see of those demands that we accept, how we limit the severity of those things. You saw that in the amount of overall resolution that happened this quarter, so I think there's a real -- you've got a team of people who are working hard and I think you saw some of that actually take place this quarter.

And do you think that this 2011 kind of number starts to work its way down now as we've seen the asset quality improvements, or is this kind of the inflection point when we'll start seeing some improvement as we move forward?

I'll answer and then I think Tom Freeman will jump in with some color. I think that's real hard to say, Marty. That's really sort of an overall economic issue. We are exposed to the economy, the whole financial system is. And the primary driver overall for credit for us, as you know, is unemployment. And as the economy goes, we're leveraged to that, we'll go the same way.

So Marty, I think while you've seen some increase in those costs as they're put together, especially on Slide 27 when you look at the detail that's put together, the core cost of running the workout businesses are remaining relatively flat and starting to decline a little bit. And what Aleem was speaking to is we're working really hard on the return loans from the agencies and making sure that we've got that stuff rationalized in the appropriate manner. I think staff is looked at, we're rebalancing our staff as our workloads go down and I think this stuff is dependent upon the number of defaults going forward as Aleem just told you. And we've had pretty good luck so far. I think right now it continues to improve. But, boy, it's an uncertain environment out there right now.

And Marty, I'd add -- this is Bill, that some of the operating losses are fees related to the delays in the foreclosure process. And you'd presume over time those will absolutely come down.

Our next question is from Matt O'Connor with Deutsche Bank.

Just a follow-up on an expense-related question. As we think about the $240 million of run rate savings you expect to get by the end of next year, how should we think about that progressing from the fourth quarter of 2011 throughout next year? Is that somewhat even? Is it going to be back ended?

I would think about it as starting in the second quarter and then lower in the first quarter and then start progressively quarter by quarter through the fourth quarter, so not totally back ended, but clearly progressive. And it just makes sense. I mean, if you got to start run rate expenses, you should build [ph] that way.

Okay. But I guess in terms of the timing of implementation of a lot of these projects, it's more likely to kick in starting in the second quarter then?

Well, it's things like implementation are today, I mean that's when it started. I mean, the example on the branch piece is we're already down in some areas in branch FTEs. You just won't see the run rate part of that until the first and second quarter, so implementation -- I don't want to send a mixed message. Implementation is now. We're more than fully underway.

Okay. That's helpful. And then separately, the detail of the government-guaranteed loans that you've provided is helpful in terms of separating the mortgage and the student, and you gave us the yields and everything. Can you give us a sense, though of what type of duration you're adding, the mortgage spreads of 3.6%; student, 4.4%? Obviously, they look low on an absolute basis, but if there's no credit risk, it can provide a different picture. But what type of duration on the mortgage side? And then just remind us on the student, the duration of how those loans are as well?

Sure thing. It's Aleem. The duration is actually quite varied, as you pointed out, depending on the type of loan that we're adding. On the mortgage side, we're adding anywhere from adjustable-rate mortgages out to 15-year fixed, out to 30-year fixed. So the overall duration across those is mixed. On the student loan side, those tend to be relatively shorter-duration loans overall. But overall, when you look at the duration of the balance sheet in total, holistically, including those loans, including everything else we've got, both on the asset and liability side, the duration of the entire balance sheet is coming down a little bit quarter-over-quarter, mostly as a function of rates coming down.

Our next question is from Todd Hagerman with Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Billy, a big focus of the quarter with the banks has been capital planning, capital management kind of going into 2012 and the CCAR progress. As you mentioned, you guys recently raised your dividend, paid back or repurchased some of the warrants from Treasury. How should we think about kind of 2012 with the capital, Bill, that you've seen this year, yet it's a bit -- again the economy we're hearing more about kind of the uncertain environment going into 2012? For SunTrust, how do we think about kind of your priorities in terms of dividends, buyback, redeeming more trust preferred and other types of things that you might be thinking about contemplating in perhaps more uncertain world in 2012?

Let me take it at a pretty high level and then Aleem might want to embellish my answer, and it probably is worthwhile actually going back a little bit to last year in the CCAR process. So if you think about last year, our submission was focused on minimizing shareholder dilution and that was #1, 2 and 3 in terms of our priorities. So that set the tone for where we started from. Today -- so going into the same process now this year, we go into this with higher capital, better earnings and it would be safe to assume that we will be more balanced in our submission regarding both the dividend and share repurchase. It will be a part of what we'd be looking at. As you mentioned, this is an industry process. We all don't know the rules yet. And Aleem, I don't know if you'd want to embellish that and maybe talk about TruPs a little bit.

Sure. I'll add a couple of points to Bill's answer. Not only higher capital and better earnings, but also a better structural balance sheet overall, less risk overall and even stronger liquidity. So overall, we're coming into this year stronger on every conceivable metric. And the focus of our CCAR submissions or going through the stress tests will be to help the Federal Reserve Board to understand exactly how strong we are coming into this and provide a balanced return to our shareholders in every way. Whether that be by dividends or some other type of capital action, we'll try to structure something like that in there if we can. Of course, as you know, we don't know what the rules are yet for this next CCAR. Apparently, we'll get all of those next month with a submission date some time in January and the response date back from them some time in March. On the TruPS question, you may have noticed we actually have been reducing our TruPS somewhat over the course of this year, so we've been finding ways to return capital to shareholders wherever we can. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: That's very helpful. And again just going back to the dividend buyback in kind of a balanced approach, if you will, can you give us a sense in terms of how you're thinking about targeting kind of the distribution or payout overall? It seems as though still a number of companies are leaning more towards dividend versus buyback and perhaps even more cautious on kind of -- in 2011, which was a kind of a 30% guideline, how do you think about that guideline going into 2012 and how you weigh again that dividend versus buyback question?

; Well, I'm not sure what the guideline will be for '12. We know what it was for '11, but it may not be there in '12. So we'll have to wait until we hear from them to find out exactly what that guideline is. But if and when they tell us, we will balance our submission around a guideline both on dividends as well as to try and find some other ways of returning capital to shareholders besides just dividends.

Our next question is from John Pancari with Evercore Partners.

Can you talk a little bit about your margin outlook going into 2012? I know you gave some color in terms of the fourth quarter, but can you talk about '12 and more specifically what you expect in terms of the impact on securities reinvestment yields as well is the impact on the loan yields, and how much that could influence the trajectory of the margin?

Sure thing. You may have seen, as you know, sort of coming into this that we were actually positioned -- one of the few banks who is positioned not to be asset sensitive. So with the big drop in rates that we got in August, we were actually positioned a little bit better than some others and so the impact on us has been slightly less and we're coming into this in a slightly better position, I think, than some other banks. Going forward, we've given you a little bit of guidance for Q4. We do expect to see a modest margin decline in Q4 also. And then, as we look out into 2012, we're thinking about the kinds of levers that we've got to be able to protect the margin. Those kinds of levers include things like further drops in deposit rates. Overall, ability that we've had to drop deposit rates has actually extended out farther than I had initially thought it would. So that's been a pleasant surprise, and we're now looking to see how we can continue to do more of that going forward. Other levers that we've got at our disposal are going to be things like further TruPS redemptions, further payoffs of our longer-term, more expensive debt. So we've got some levers that we're going to be continuing to pull on to try and manage the margin overall. But we're focused not just on the margin, we're also focused on the net interest income number. And we're going to be trying to protect that net interest number as much as we can through 2012.

And don't sort of excuse the fact also of the discipline that we put in the management of both the asset and the liability side of our balance sheet, so part of that improvement in prior quarters in NIM was just due to just a much tighter management. So to Aleem's point, that's also a continued lever.

Okay. And your implication of trying to protect the margins, you're implying there's probably a downward bias there, but you're aiming to keep it stable?

I think if rates stay where they are, we'll have runoff. We do have loans paying off. We do have securities maturing. And that runoff will be invested in the current rate environment, whatever that happens to be. So if rates do stay low, I think that what you'll see for the industry, overall, will be a continued decline in margins.

Okay. And then my follow-up would just be on -- you mentioned that you're focusing on supporting NII, net interest income, and can you talk a little bit about your strategy around the bond portfolio? Are you looking to move out the curve a bit there to seek a bit of yield?

We're actually not pushing out the curve much. We've always had a strategy of laddering our reinvestments. Our portfolio has always had monthly cash flow. So as that cash flow has increased somewhat due to the reduction in rates more recently, we're continuing that strategy on and we're buying securities anywhere from 5-1 ARMs out to 30-year or agency MBS. We're just continuing the same strategy we've always had.

Our next question is from Craig Siegenthaler with Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: What specifically drove the pickup in the OREO balances? And I'm wondering, could the -- maybe a little more aggressive disposition of these balances impact pre-provision earnings in the fourth quarter.

So what drove the increase in the balances was the success in moving a lot of the commercial loans from a collection status to a resolution status. Actually, our success rate on the resolution activity is pretty good. We're able to dispose of the foreclosed properties very quickly once we get them in the queue for disposition. So we've been able to meet our disposition costs, our disposition activity, I think, quite well. And we control those costs, I think, pretty aggressively. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And then just kind of one housekeeping question here. Can you help us with the tax rate? I believe you pay a statutory 35%, which is offset by roughly $100 million of tax shield benefit. How should we think about this rate in the fourth quarter?

Well, I think the way to think about what our tax rate is likely to be is, that as you say, we've got about $100 million of income that's generated that's roughly tax free. And above that, we pay the statutory tax rate. So whatever your model says for what you expect our net income to be, that's generally a good way to think about that. And where we've been over the last couple of quarters, if you average those out, that works out to roughly about 18%. Craig Siegenthaler - Crédit Suisse AG, Research Division: And is the $100 million mostly from bonds that are tax free, or is it from like low-income housing credits?

It's only partially from bonds. It's actually a lot from our overall business with local government clients.

Our next question is from Matt Burnell with Wells Fargo Securities.

Just a question on commercial loan growth. Commercial loans were up about 2% this quarter, and I'm just curious about the competitive environment. Most of the regional banks have reported C&I loan growth that has been much stronger than the overall portfolio growth. I guess, I'm curious as to your thoughts about how competitive that environment has gotten and how pricing has responded to that, or has the backing away of some of the European players in the U.S. market provided some more opportunities so competition really hasn't gotten that bad?

In fairness, you're asking and answering the question because I think that's exactly it. I mean, there are a lot of countervailing forces here. You've got the supply and demand issues of banks working hard to increase loans, counteract them. So on the commercial side, sort of low-end commercial, middle commercial, that continues to be competitive. Although I'll say our coming-on spreads are -- haven't experience the kind of decline you might expect from a highly competitive market. And then on the large-end corporate side, I mean, I think you've defined it. I mean, what's happened in the last quarter is a pretty dramatic shift. Now you won't see that in the total portfolio. But in coming-on spreads, you've had actually some increase.

And if I can, just to follow-up on Basel III. Have you estimated your Basel III Tier 1 common capital ratio relative to the Basel I ratio that you reported this morning?

Indeed we have, Matt and they're actually very similar. You would normally expect Basel III capital ratios to be substantially lower than Basel I ratios, but we get a benefit primarily as a result of the large unrealized gain we have in our securities portfolio. And as a result, our Basel III and Basel I numbers are coming in almost on top of each other.

And how are you thinking about managing for the liquidity requirements under Basel III? Have you started to do that or are you still waiting for a bit more guidance in terms of that part of the regulation?

We're watching that very carefully. And I personally expect that the way the current regulations are written, there will be a little bit of flex in that between now and the final regulation. So we're aware of it. We're watching it. We know where we are, but I expect that there'll be little bit of change between now and when they're finalized.

Our next question is from Ken Usdin with Jefferies. Ian Foley - Jefferies & Company, Inc., Research Division: This is actually Ian Foley in for Ken. A quick question for Tom. Just how should we think about reserve release going forward and where it could potentially bottom out once charge-offs normalize in the future?

You're sort of breaking up. Can you repeat that question? Ian Foley - Jefferies & Company, Inc., Research Division: Yes. I just wanted to talk about reserve release going forward and kind of where you think the allowance could bottom out once charge-offs normalize?

I think if you take a look at what we've done over the past several quarters, we've given some small very gradual releases in the reserves as our credit quality metrics have continued to improve roughly about $100 million of reserve relief per quarter. This has come in conjunction with improved risk metrics across the portfolio. I think if you look relative to a year ago, delinquencies are down 25 bps, NPLs are down 25% and charge-offs are down almost 30%. And I think concurrent with the risk reduction in the portfolio, we've been growing high-quality assets, including significant portion of government guarantee. As a result of all of this, we have lower incurred losses, the GAAP basis of the reserve. Our ALLL process is rigorous, diligent and we certainly are keeping an eye on the pace of the recovery. But in light of that, we continue to keep a meaningful qualitative reserve. But overall, we feel the reserve is properly calculated and more than sufficient at the current time. Ian Foley - Jefferies & Company, Inc., Research Division: All right. And then a quick question on mortgage banking and production. Just as far as revenue recognition and whether any of this quarter's spike in demand could carry through next quarter and kind of just your outlook on whether gain on sale margins are sustainable or not.

Well, we just -- we had production was up 24% or so and application volume was up about just shy of 30%. So that's a pretty good indication at least for the start of the fourth quarter. And as it relates to gain on sale margins, we continue to see those at a pretty high base. This has been a pretty good environment. And again sort of early reads are that it's continuing to hold up.

Our next question is from Jefferson Harralson with KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask about rep and warranty and just talk about GSE behavior, residual [ph] rates, severities, expectations for provision, anything you can do to help us think about how this expense changes in the future and how this -- how the total expense is going to play out over time.

Well, Jefferson, I wish I could help you more. You know this has been a very volatile issue overall. If you think back a little bit, you know that the trends and the demands actually declined pretty substantially and more than we expected late last year. And then in the last couple of quarters, they've come back up again. So it is hard to speculate what the future activity is going to be. Assuming that demand stay elevated again in Q4 sort of seems reasonable, but it's tough to give you a good read on subsequent quarters past that. It does stand to reason that the further we get away from 2006 and the 2007 vintage, that mortgage repurchases will have less of an impact because the later vintages have tighter underwriting criteria and came in after the bulk of the housing price declines. And the improvement in our delinquency ratios, overall, do suggest that lower demands will eventually follow. But to be fair, we haven't seen what we expected so far. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That's helpful. And my follow-up, I wanted to ask you about the trading line item x the DDA. Can you talk about the quarter-to-quarter decline there and talk about whether the fourth quarter is the type of environment where that could bounce back? Or if you just expect some low trading revenue for a quarter or 2?

Well, as you know, on a reported basis, our trading line item went up. But after excluding out the adjustment items, core trading was down about $15 million to $20 million quarter-over-quarter. The majority of that really happened in August as a result of all of the market volatility and all the issues that happened in Europe. We're not a huge trader. Most of our trading positions are really kept to service our client business. But we were impacted a little bit by that risk-off trade that happened in August and concurrent with the downgrade of the U.S. debt by S&P. In the fourth quarter, I think typically, what you see happen across the industry is trading revenue generally goes down as we get into the holiday season. It's a little hard to say now what the whole quarter is going to look like.

I think the important point that Aleem highlighted is this is not a big line item for us. I mean this is really only the core trading is $15 million to $20 million a quarter anyway. So this isn't going to have sort of wide variations that you might see somewhere else.

We're about out of time. I'm going to go ahead and turn it over to Bill, and he's going to wrap us up today.

Okay, Kris, thanks. And I just had a couple of closing comments. We're under no illusion that the operating environment is going to be easy, but we're focused on and making meaningful progress in the areas that we can control. So just to summarize, if I could, this quarter, we saw loan growth in our targeted commercial and consumer categories. Deposits hit a record new high. Credit trends continued to improve. We grew tangible book value. And our capital ratios were well in excess of current and proposed regulatory requirements, including Basel III. Our strategic priorities are set. Our teammates are focused. Our results are showing signs of progress. So with that as a conclusion, thank you for joining us today.

Thanks, everyone. Feel free to give the IR department a call if you have any further questions.

Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.