Solidion Technology Inc. (STI) Q3 2013 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, you may disconnect at this time. I would now like to turn today's meeting over to Ankur Vyas, Director of Investor Relations. Thank you. You may begin.

Thank you, and good morning. Welcome to SunTrust's Third Quarter Earnings Conference Call, and thanks for joining us. My name is Ankur Vyas, and I'm taking over the Investor Relations role from Kris Dickson. I look forward to meeting many of you over the coming quarters and years. In addition to the press release, we've also provided a presentation that covers the topics we plan to address during the 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. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and CEO; 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 today, 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 our website, www.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third party. The only authorized live and archived webcast are located on our website. With that, I'll turn the call over to Bill.

Thanks, Ankur, and welcome to the team. One of the first things you learn as CEO is how important the IR role is, and I want to take this opportunity to publicly and personally thank Kris Dickson for his leadership. As many of you know, he's continuing his great career in SunTrust in our commercial real estate area. So, Kris, thank you. Now as usual, I'll start this morning's call with a quick overview of the quarter. Then I'm going to pass it to Aleem to provide details on the results. I'll return to wrap up with business segment highlights and some of our good core trends. Earnings per share for the quarter were $0.33 on net income of $179 million. As you know, we had some large items that impacted this quarter, particularly related to the resolution of key mortgage matters. Where appropriate, we'll speak about results excluding these items to make the underlying core operating story clear. I set an objective this year to get as many legacy issues behind us as possible on the best terms available. As you know, there have been discussions happening on these legacy mortgage matters for months and, in some cases, years. Dialogue with the respective parties increased this quarter, which enabled us to resolve a number of key items. These included: first, reaching agreements with the U.S. government to settle claims regarding originations, practices related to FHA-insured loans and SunTrust portion of the national mortgage servicing settlement; and secondly, resolution of GSE mortgage repurchase claims as we reached agreements with both Fannie Mae and Freddie Mac regarding the outstanding and potential repurchase obligations. Separately, we completed an expansive review of our servicing advanced practices, which led to an allowance increase. During the quarter, we also completed our previously disclosed reorganization of certain subsidiaries, which netted a tax benefit. It was important to get these key legacy mortgage-related matters behind us. Doing so helps us reduce uncertainty in the business and improves our overall risk profile. Ultimately and most importantly, it enables us to increase our focus on the future of the company and the opportunities we see in all of our businesses. Excluding these items, earnings per share was $0.66 this quarter, and we had the continuation of noble core operating trends, such as steady loan growth, expense reductions and further credit quality improvement, which helped offset a significant drop in mortgage revenue. So looking more closely at core results. Net interest income was substantially unchanged relative to the previous quarter. The continued low interest rate environment drove 6 basis points of net interest margin compression, though earning asset growth helped to offset this impact. The sequential decline in adjusted noninterest income was primarily driven by lower mortgage production income due to both production and gain-on-sale margin. Conversely, investment banking had another strong quarter. Wealth management fees were up, and mortgage servicing income, as expected, recovered somewhat from last quarter's low level. We continue our intensive focus on expense management in our ongoing efforts to drive efficiency improvements. Adjusted expenses declined, and this marks the third consecutive quarter where we kept them below $1.4 billion. Overall, core expenses trended down from both the prior quarter and prior year. But given the mortgage revenue headwinds, we're above our efficiency ratio targets. I'm viewing the mortgage revenue challenge as more permanent, and we'll have to adjust our expense base accordingly, both in this business and across the company. Average performing loans increased $1.6 billion on a sequential quarter basis with growth across several loan portfolios, and average client deposits were stable compared to the prior quarter with the continuation of the favorable mix to lower cost deposits. The credit quality story continue to be a good one with nonperforming loans and net charge-offs hitting new 6-year lows. Nonperforming loans declined by 9% from last quarter and 40% from last year, and this quarter's net charge-off ratio improved to 47 basis points. Lastly, our capital position remained solid with Tier 1 common estimated to be 9.9% on a Basel I basis and 9.7% on a Basel III basis. We're certainly pleased that the government shutdown has concluded and that the debt ceiling prices has been averted. Our hope is the government can reach a partisan agreement on ways to permanently close the budget gap. This is a fragile but very real recovery predicated on consumer and business confidence. Now I'll pass it on to Aleem to give you some more detail on the results.

Thanks, Bill. Good morning, everybody, and thank you for joining us this morning. I'd like to also have my personal thanks to Kris for his time as Head of IR. As many of you will appreciate, Kris is moving on to a revenue-generating role for the company, and that'll be helpful. And while we'll miss him, I'm sure you'll all enjoy working with Ankur in the future. As Bill indicated, there were a number of significant items that impacted this quarter's results. So before we delve into our normal review of operating performance, I'll spend some time providing a bit more detail on these items that we preannounced last week. First, we signed agreements in principle with the government to settle 2 legacy mortgage-related matters: FHA-related originations and the national mortgage servicing settlement. The FHA-related settlement covers claims arising from loans originated from January 2006 through March 2012. Mortgage servicing settlement represents SunTrust's portion of the broader national settlement that was agreed to by the larger banks in 2012. The settlement of these 2 matters was the primary component of the $323 million of specific operating losses we incurred this quarter. As indicated last week, after these charges, we do not expect the effects of these agreements to have a material impact on future financial results. Secondly, we resolved the Freddie Mac and Fannie Mae repurchase matters. These resolutions resulted in an incremental $63 million mortgage repurchase provision this quarter as the population of loans that were included in these 2 agreements was broader than considered in our existing mortgage repurchase reserve. The next item I'll cover is the reserve increase for servicing advances. By way of background, servicing advances are payments we make when the loan becomes delinquent. For example, taxes and insurance, property maintenance, legal and, in some cases, principal and interest. We recouped the majority of advances on loan service for others when the loan is ultimately resolved and cash flow is collected on the defaulted loan. The reimbursement criteria and repayment risk for servicing advances will depend on the investor type and will vary significantly with the lowest recoverability on portfolio loans and the highest recoverability on agency servicing. This quarter, we completed an extensive review of our servicing advance practice, including operational processes and methodologies employed in estimating loss exposure. Separately, we also completed the -- a sale of a $1 billion in UPB of predominantly delinquent MSRs this quarter. Based upon the completion of the review and the MSR sale, we determined that we needed to increase the allowance for unrecoverable advances, resulting in a $96 million impact to collection servicing expense. Lastly, as previously disclosed, we completed the taxable reorganization of certain subsidiaries, which resulted in the recognition of a tax benefit. This was partially negated by 2 smaller items. The net impact of all these items was a $113 million reduction in this quarter's provision for income taxes. Combined, the preannounced items negatively impacted third quarter earnings by $179 million after tax or $0.33 per share. Turning to Slide 5, I'll provide some summary observations on this quarter's key core earnings drivers and then we'll delve deeper on subsequent slides. As Bill noted earlier, where appropriate, I'll refer to earnings trends excluding the items that significantly impacted this quarter, as well as the third quarter of last year. On an adjusted basis, our earnings per share this quarter was $0.66, which was $0.02 lower than the last quarter and $0.08 higher than last year. Sequential quarter decrease was due largely to lower mortgage production income, which was partially offset by a lower loan loss provision and reduced noninterest expenses. Compared to last year, core earnings per share increased 14% as reductions in adjusted noninterest expense and the loan loss provision more than offset declines in net interest income and mortgage-related revenues. We'll review all the underlying trends in more details, starting on Slide 6. Consistent with our guidance last quarter, the net interest margin declined 6 basis points sequentially as earning asset yields compressed 7 basis points due to the continued low interest rate environment, partially offset by a 2-basis-point reduction in deposit rates. Net interest income declined sequentially by $2 million as the lower net interest margin was largely offset by higher average earning assets and an additional day this quarter. Relative to the third quarter of 2012, net interest income was $61 million lower and the net interest margin declined 19 basis points. The primary drivers of both were lower asset yields, the impact of last year's loan sales and a reduction in commercial loan swap income, partially offset by favorable shifts in the deposit mix, lower deposit rates and reduction in long-term debt balances and costs. Looking forward, we expect the net interest margin to, again, decline in the fourth quarter, albeit at a slower pace relative to the decline we experienced this quarter. Moving on to Slide 7. Adjusted noninterest income declined $112 million from the previous quarter, primarily driven by lower mortgage production income. Reported mortgage production income was a negative $10 million this quarter. Excluding the $63 million impact of the repurchase settlements, mortgage production income declined sequentially from $133 million to $53 million. Gain on sale was the primary driver of the decline due to lower locked volume associated with the 45% sequential drop in mortgage applications. Gain-on-sale margins compressed during the quarter due to industry competition and the impact that higher interest rates have on post-lock activity, particularly during the first part of the quarter. Origination fees also declined sequentially from $59 million to $44 million in light of the decline in closed loan volume. Mortgage servicing income increased $10 million sequentially due to lower decay in the MSR asset, which is a result of lower refinance volume due to higher interest rates. As a reminder, the decay on the MSR asset is recorded as loans closed, and therefore, we would expect servicing income to again increase in the fourth quarter as close refinance volume further declines. Investment banking had another strong quarter as revenues increased sequentially due to incrementally higher M&A and equity-related revenues. Wealth management also continued its steady growth as a result of solid market conditions and deepening client relationships. Other noninterest income declined as a result of a $37 million write-down on a portfolio leasing assets due to an updated assessment of residual values. Trading income declined by $16 million on a reported basis, primarily due to a $14 million change in our fair value debt marks. Core client trading activity was stable sequentially, albeit weaker than normal given market uncertainty. Looking year-over-year, adjusted noninterest income improved $14 million as reductions in core mortgage-related revenues were more than offset by a lower mortgage repurchase provisions and solid growth in investment banking and wealth management-related fees. As we look to the fourth quarter, we anticipate core mortgage production income to remain under pressure in light of the slowdown in refinance volume and a typical seasonal decline in purchase activity. Conversely, we expect mortgage servicing income to increase, and we expect investment banking income to have another strong quarter. Let's now move to expenses on Slide 8. Core noninterest expense increased $346 million from the previous quarter, driven entirely by the actions we highlighted in last week's 8-K. On an adjusted basis, expenses declined by $73 million sequentially. Compensation and benefits expense was the largest component of the decline, down $55 million from the previous quarter. $37 million of this is related to previously accrued incentive expenses, which we reversed in light of our net financial performance this quarter. While this accrual reversal won't repeat itself in the fourth quarter, it does demonstrate our pay-for-performance commitment. As usual, we have provided you detail on our cyclical costs in the appendix. Due to this quarter's resolution of the legacy legal matters and the increase in the mortgage servicing advance allowance, cyclical costs increased substantially on a reported basis. However, excluding these significant items, our cyclical costs were $75 million. Looking at year-over-year trends, our reported noninterest expense was fairly flat. However, excluding the impacts of the specific actions we took in the third quarter of 2012 and the third quarter of 2013, adjusted noninterest expense declined 14%. This was driven by widespread reductions in core operating expense categories, as well as the abatement of adjusted cyclical expenses. This also marks the third consecutive quarter that our expenses, on an adjusted basis, were below $1.4 billion, whereas, you'll recall, we had been previously operating at about $1.55 billion quarterly run rate. We have made progress in becoming a more efficient organization, and prudent expense management remains an area of focus for all of our teammates. As you can see on Slide 9, our adjusted tangible efficiency ratio was flat relative to the previous quarter, bringing the year-to-date adjusted tangible efficiency ratio to 65.5%. This keeps us on target toward our interim goal of approximately 65% for the year. And more importantly, we remain firmly committed to achieving our long-term target of below 60%. Turning to credit quality. Asset quality continue to improve this quarter with the net charge-off ratio declining from 59 basis points to 47 basis points sequentially. It is now at its lowest level since the third quarter of 2007. Nonperforming loans were also lower, declining 9% sequentially and 40% year-over-year. Improvement in asset quality has been largely driven by positive trends in our residential portfolios. The improving housing market continues to drive lower residential delinquencies, lower loss severities and higher prices upon disposition of foreclosed assets. Concurrent with lower net charge-offs and overall improving asset quality metrics, provision expense declined $51 million sequentially and the allowance for loan and lease loss ratio fell 8 basis points. As we look toward next quarter, we anticipate that nonperforming loans will continue to trend lower and for net charge-offs to be relatively stable to the third quarter level. Consistent with our comments in recent quarters, we continue to expect future credit quality improvement to be led by residential loans as commercial and consumer credit metrics are already at or below normalized levels. Turning to balance sheet trends on Slide 11. Average performing loans increased sequentially by $1.6 billion or about 1.3%., which is the highest sequential quarter loan growth we have experienced since the first quarter of 2012. Growth was broad-based, though principally driven by commercial real estate and non-guaranteed residential mortgages. CRE loans were up 8% sequentially due to expanded relationships with clients in our footprints, growth in our institutional business and success in our REIT platform. Non-guaranteed residential mortgages grew primarily due to the addition of high-quality jumbo mortgages. Most other loan categories were stable or modestly positive relative to the prior quarter. With the exception of continued paydowns in our government-guaranteed mortgage portfolio. Relative to the prior year, performing loans were down modestly as core growth in C&I and consumer portfolios was offset by targeted reductions in our guaranteed portfolios. C&I loans were up $2.7 billion or 5%, most notably from growth in not-for-profit and government and most CIB industry verticals. Consumer loans, excluding guaranteed student loans, were up $900 million or 6%. Guaranteed student and mortgage loans declined approximately $4 billion, combined, relative to the previous year, primarily due to the loan sales we executed late in 2012. While loan growth improved this quarter, we would still characterize it as modest overall. However, our commercial loan pipelines continue to increase and overall economic indicators in our markets are also improving. Turning now to deposit performance. Average client deposits were flat relative to the previous quarter as growth in money market accounts was offset by modest declines across other deposit product categories. Relative to the prior year, deposits were up 1%, though the underlying favorable shift in the deposit mix is the more notable event. Lower cost deposits were up $3.5 billion, driven by growth across all categories. Concurrently, higher-cost time deposits were down by $2 billion. This favorable shift in deposit mix helped drive down interest-bearing deposit cost by 12 basis points year-over-year. Slide 13 provides information on our capital metrics. Tier 1 common capital expanded by approximately $100 million, and our Tier 1 common ratio was just under 10%. The sequential quarter decline in our Tier 1 common ratio was due to an updated risk weighting for certain unused lending commitments for corporate clients. This revision did not impact the estimated Basel III common ratio, which we estimate grew to 9.7%. As shown at the bottom of the page, our tangible common equity ratio and tangible book value per share both increased modestly, given growth and retained earnings. We also continued our share repurchase program this quarter, buying back $50 million of our common stock. Per the capital plan we submitted in conjunction with the CCAR process, we have the capacity and the intent to repurchase up to another $100 million through the first quarter of 2014. With that, I'll now turn things back over to Bill to cover our business segment performance.

Okay. Thanks, Aleem, and I'll start on Slide 14, which highlights several core operating trends that continued in our business segments this quarter. In our consumer banking and private wealth management business, net income growth was driven by meaningfully efficiency improvements, ongoing credit improvement, particularly in our home equity book, and higher noninterest income driven by growth in wealth management. In addition, you'll recall that the third quarter of last year had elevated provision levels due to our junior lien policy change, which accelerated the timeframe for charging off these loans. Overall, revenue was relatively stable to the prior year as the decline in net interest income, due to the $2 billion loan sale in 2012, was mostly offset by solid growth in our wealth management business. We've seen growth in fee income due to increased fixed annuity sales, which benefited from higher rates and strong growth in our managed account business. We've steadily improved the tangible efficiency ratio in this segment, driving it on down over 5 percentage points in the last year to 64.4%. We've made meaningful progress in our efforts to better align our branch network and staffing models with evolving client preferences. This is translated into an 8% reduction in our branches from last year. Going forward, we do expect additional net reductions in our branch network, however, the overall rate of decline will slow. Loan balances were down from last year due to the fourth quarter student loan sales, but we continue to see solid organic loan growth. Consumer loan production was up 6% year-over-year. And if you exclude the student lending portfolio, production was up 14%. Overall, deposits were up 1% with a continued favorable mix shift that drove further declines in rate paid. Let's take a little bit closer look on our wholesale business. Wholesale had another strong quarter overall. However, results were affected by the leasing write-down we discussed earlier, which, in addition to weaker trading income, drove our 6% decline in revenue. Net interest income was up $17 million or 4% as the business produced solid loan growth. Investment banking income was up 19% year-over-year, driven incrementally by growth in M&A and equity-related revenue. Loans grew 6% this quarter driven by our not-for-profit and government industry vertical, core CRE and our large corporate lending areas, most notably asset securitization, asset-based lending and our energy vertical. We feel good about our pipeline, which was solid across most of our wholesale businesses. Utilization rates remain stubbornly low at approximately 30%. So that, too, I think represents an opportunity looking ahead. Ongoing improvement in credit quality helped drive a decrease in the provision for credit losses, though provision expense in the third quarter of last year was elevated due to the charge-off associated with the CRE nonperforming loan sales. Wholesale has been and should continue to be a growth engine for SunTrust. We're very well positioned to compete and have a lot more runway in each of our key lines of business. Now let's look at mortgage. The big topic this quarter with respect to the mortgage business was obviously the resolution of key certain mortgage matters. While the resolution is important, these items, along with the servicing allowance increases, contributed $344 million of the $405 million loss. Excluding them, the mortgage business lost $61 million, which was a modest improvement from the previous quarter as lower expenses and improving credit quality offset the decline in mortgage production income. Now with that said, having a lower loss is simply just not the objective. We're beginning to implement aggressive policies and rightsizing our mortgage business, both as a result of continuing resolution of legacy matters and as a response to the current origination environment. We intend to reduce our mortgage staff by 20%, which translates to roughly 800 full-time equivalents. These are tough decisions, given the impact the team makes, but it positions us with a chassis that better reflects our decisions and the current environment. In the fourth quarter, we anticipate overall production volume will continue to decline, given the normal seasonality and the sharp falloff in the third quarter application activity. To put this quarter in perspective, our quarterly mortgage revenues, excluding the mortgage repurchase provision, declined by approximately $300 million year-over-year. Despite this, our adjusted consolidated earnings were up 14%, which I think speaks to our business diversity, efficiency efforts and improving credit profile. So in summary, I think there are plenty of opportunity that exist across our businesses. We've had some tailwinds, and we've certainly had some headwinds, but we put a number of the legacy issues behind us and can now more fully focus on the future. We remain convinced that our strategic priorities to generate profitable growth and become an even more efficient company are the right direction for SunTrust and will continue to augment our positive core operating momentum. So with that, Ankur, let me turn it back over to you, and we can start taking some questions.

Okay. Thanks, Bill. Karen, we're now ready to begin the Q&A portion of the call. [Operator Instructions]

[Operator Instructions] Our first question or comment comes from Ryan Nash from Goldman Sachs.

I guess a question relating to expenses. First, from a high level, Bill, you mentioned needing to adjust expenses in both mortgage and across the company. I assume when you guys did PPG, you did a deep dive across the company. So just trying to get a sense of where should we expect to see more costs coming out over the next couple of quarters. And just related to that, the efficiency has been flat over the last 2 quarters. And with mortgage still under pressure and the margin falling, just how should we think about your ability to continue to bring down the efficiency ratio over the next couple of quarters?

Okay, thanks. Good question. Let's sort of start with the mortgage piece and maybe I can sort of put some numbers around that. We talked about the FTE decrease related to, again, not only the decision we made to sell delinquent servicing, but also sort of just recognizing that I think we're in sort of a permanently different environment that's much more production-oriented versus refinance-oriented. If you put some numbers around, I think by the end of the the first quarter or start of the second quarter, all things being equal, which, I guess, things are always not equal, but all things being equal, that would be about a $50 million run rate as it relates to mortgage, specifically on those decisions -- yes, quarterly. We then -- I talked about at the last conference, a review the we're undertaking based on some structural changes we made in our company to really look at about $1.5 billion worth of, let's call them, operations cost, for lack of better description, in all of our segment areas. We have a significant effort underway there. They would be in things like consolidation of lending areas, looking more to our call centers, the kinds of things that we would do to not only make ourselves more efficient and client responsive, but I think just we've got some significant opportunities. Then continuation of more actualizing and annualizing the decisions that we've already made as it relates to our branch network. Remember, we sort of see that come in slowly over time, and we'll continue to see that show up in our numbers. Then it's everything. And I think as Aleem noted, and I think if you ask anyone in SunTrust what their commitment was to efficiency, they'd tell you, and it's everything. It's real estate compression, it's core expense saves, it's increasing productivity of teammates. So it's a pretty wide range of activities supplemented by some specific things, including mortgage and the operations review. As it relates to the long-term efficiency goal, as I said, I mean, I think we have sort of a permanent loss in top line revenue for mortgage, but we also said we're not giving up on our 60% efficiency ratio. So I think that's -- we may have extended the goal a little bit, but we're not backing off that goal. And I would expect to see continued improvement in our efficiency ratio next year.

Great. And then I guess just one unrelated question for Aleem. Aleem, charge-offs continue to come down nicely, and yes, I know you're saying flat for next quarter. But resi is obviously still elevated at 82 basis points, and that's probably the biggest area of improvement from here. So can you give us a sense of how you're thinking about the trajectory of that? How low do you think that can eventually go, and what are you thinking in terms of the timing?

All right. When you look at the components of charge-offs overall and consumer overall, you look at sort of the non-resi component of that book and that's already at pretty low levels. The resi component probably has a little bit of a way to go. When you look at wholesale, wholesale charge-offs are, again, already at pretty low levels. So as you noted in the question, the opportunity mostly sits at mortgage. And mortgage charge-offs do still have a way to go, but it's unlikely they're ever going to get to sort of the bottom that we saw in the '05-'06 level. I would expect that charge-offs will continue to trend better over the next little while. At 47 basis points for the company overall, we're sort of within our cyclical operating range that we expect over a cycle of 40 to 70. But as the quality of origination since 2009 has been so strong, it's not unreasonable to assume that charge-offs will continue to come down as the high-quality origination plays out in our book in our next little while. So I would expect charge-offs to continue to trend down and -- over the next little while.

Our next question or comment is from Betsy Graseck from Morgan Stanley. And we're not getting a response from her. We'll go to our next question. Our next question or comment comes from John Pancari from Evercore.

Given your color you gave us on expenses, can you just help us think about how we should think about total expense levels over the next several quarters here? Given we saw some good declines in the environmental costs, and I know you're pushing these programs you mentioned, Bill, but how should we think about where total expense levels can trend over the next couple of quarters?

Well, John, let me start off with that. I think there are sort of several components to total expenses. If you look at comp, you can see this quarter, we made a difference on comp. Bill talked about some of the initiatives that we've got and changes that are going to happen in mortgage, the annualization of previous programs as they kick in. We've also got other programs going on in terms of managing our occupancy costs, manage other operating and back-office costs. And then, of course, we still have opportunity left, I think, in our cyclical costs. And if you remember, 2 years ago, those were $700 million rounded. Last year, they rounded to $600 million. This year, if you annualize our first 3 quarters, that number is down to $360 million, and we've guided to that number coming down on an annualized basis to below $325 million. So I think we've got opportunities still in a lot of expense categories to continue to manage those down. One of the minor hit, ones we're going to face again, that as we go through some of these programs, we'll probably have some one-offs. To cut long-term expenses, there might be some minor charges, one-offs to get those programs in place. But I would be looking for next year's overall expenses to be better than this year's overall expenses.

Okay. And has there been any determination of the potential savings on that $1.5 billion that you're evaluating in the back-office costs?

Yes. John, we're sort of in full diagnosis phase on that right now. So you should assume we -- I wouldn't talk about it unless I thought there were some significant savings as it relates to that, but we really haven't sort of finalized numbers, run rate and timing on that yet.

Okay. And then lastly, I just want to get a little bit of color on your thoughts around the margin. The loan yields pulled back quite a bit this quarter, down about 11 basis points. It seems a bit high. So I just want to get an idea of how you're thinking about where that can trend and what that means for the magnitude of the margin compression that you expect.

Well, I think next quarter, we do expect a little bit more margin compression, John, but overall, smaller than we saw this quarter. As you saw, this quarter, we saw 6. Next quarter, anticipate that to be smaller. Looking out into next year, obviously, we've got some headwinds and tailwinds. We've had 30 years of interest rate declines and interest rate increase since June. This is going to offset that immediately, right? So we've got games being played on both sides here. On the negative side, even with the steepened yield curve, we will see probably a little bit more asset yield compression feeding in as the long-term assets roll off and late next year, as some of the swap book rolls off a little bit also. On the positive side, that starts to make us more asset sensitive in mid-to-late '14 as short-term rates ought to start to go up and we start to take advantage of that. And we continue to be able to manage our non-maturity deposit rates down. Obviously, they're getting down to very low levels. It's difficult to do that from here, but we were able to do -- get another couple of basis points out of that this quarter, and hopefully, we'll be able to continue to manage that further. And then as we get higher short- and long-term rates, that ought to benefit our portfolio as we re-invest our portfolio at higher rates going forward.

Our next question or comment is from Erik Najarian from Bank of America.

Just my first question is a follow-up on the expense levels over the next few quarters. If I take the $1.324 billion core that you posted this quarter, add back the $37 million comp accrual but take out the $50 million in quarterly expense, is the message there that, all else being equal, you could enter second quarter of '14 with a run rate of $1.31 billion? Is that a good starting point for us to think about?

I think that's about the right type of starting point, Erika. Obviously, there are going to be lots of puts and takes. And as Bill was careful to say, that's all else being equal. But all else being equal, that's the kind of starting point we'd be looking for.

Got it.

I think the overall message and maybe the simple answer is down. I mean, the expenses are going to be down in 2014.

Got it. And I guess making it simpler, to use your words and taking a step back, how much does your -- does the mortgage headwind delay the long-term efficiency goal of below 60%, if at all? And I guess I'm wondering, it sounds like you're very optimistic about some of the expenses that you could extract outside of credit-related op costs. So as we think about the timing of when you're achieving that below 60% goal, is this something that we could potentially see by 2015? And if so, is the message there that you can get there through expense, mostly expense cuts?

Erika, I think we're going to get part of the way there through expense cuts. I don't actually think that it'll just be expenses alone that get us there. When we set that 60% target, you recall, that was a couple of years ago and our revenue base was higher then, and the 60% then was sort of all being equal. Revenue has fallen since then, given what's happened in the mortgage market. So we're going to work to decrease the size of our chassis. We're going to work hard to become more efficient and bring lower expenses to the table. But at end of the day, I think we'll need some revenue growth to help us get there. Now we are seeing revenue growth and revenue opportunities in many of our businesses. As Bill said earlier, you saw how our performance has improved in consumer and private wealth. You saw the increase in the bottom line in our wholesale business and the opportunities there that we have in the CRE, in core commercial and in CIB. Our challenge on revenue has been mortgage, but we're working to make that up across our other businesses. And if we get any kind of a tailwind at all on rates, that'll make a big difference.

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

Just on the expenses for next year, you're saying they're going to be down versus this year. You're obviously excluding the big one-offs this quarter, right?

Yes.

Okay. And then just separately on credit. As we think about the reserve ratio over time, any thoughts on where that might settle out?

Well, I guess, Matt, if charge-offs continue to come down and the quality of the portfolio continues to go up, the ratio may trend down a little bit, but that's true for the ratio. But when you think about it in dollars, remember, we're also expecting loan growth. So as we get loan growth, that might inhibit the decline in dollars of allowance.

Our next question is from Paul Miller from FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Guys, going back to the charges you took over the quarter, especially the one referring to the loan servicing and advance revaluation, what drove that? Was that driven by the regulators or by just internal concerns that the -- there's a -- about those advances?

That was completely internal. We went through a sort of long and extensive review of our overall servicing advances. And servicing advances are sort of pretty complex topic that depend very much on the type of bank and sort of the type of investors that you have. So after going through the -- that review overall, we've decided that that we needed to increase the size of the allowance we had against all of these advances. And just a little bit of color, the reserves we had previously worked for aged advances, and we changed our methodology to take a look at the percentage of the entire balance of advances. And that's what -- and the change in that is what drove the increase in the allowance. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then what other -- is there any other -- because a couple of companies have the Department of Justice looking at FHA loans. Is there other issues? It looks like you solved your problems with Fannie and Freddie, but are there other things out there that could pop up with other litigation charges down the road?

Well, remember, in this settlement of national service standards, it was -- it was combined with the FHA origination settlement with DOJ. So those actually, for us, were put together, which is actually sort of a key component of what we were -- of what we're wanting to accomplish because they are, at the end of the day, fairly interrelated, and we didn't want to get in a situation where we were bifurcating those 2 potential settlements. As we disclosed in the second quarter, we do have an investigation into the administration of our HAMP program. We don't really have anything new to report on that. As you can imagine, we're cooperating fully, and we'll see where that one progresses. But as far as the big ones that we -- that are more common and that we know about, we're comfortable that we've reached the right conclusions on those. Paul J. Miller - FBR Capital Markets & Co., Research Division: And what about the FHFA suit on securities? Are you included in that lawsuit?

No, we're not.

Our next question or comment is from Ken Usdin from Jefferies.

I want to just come back up to the top line, where we were talking about the outlook for efficiency and understanding that you're very compelled to 60% and that it may take a little bit longer. But obviously, there's some top line challenges you need to overcome as well with NII and mortgage, et cetera. So can you talk about the outlook for revenue growth next year? What pockets might you have to help fill the gaps from some of those more overt top line challenges?

Yes. Let me sort of just maybe start us. And I'm actually glad you asked the question because we've been so focused on the expense side of the efficiency ratio, recognizing that the real juice is on the revenue side. And although we have the mortgage headwinds, we also have a lot of tailwinds, which we talked about in our core businesses. And maybe just -- let me just sort of hit on a few of those without giving sort of specific revenue guidance. But if you go down sort of our consumer and private wealth side, we're really seeing good momentum on the private wealth side. That is a result of both market conditions, but more importantly, sort of meeting more client needs. Our penetration there is up. Our referrals from our branch network, through our retail investment income side, is really on a really solid trend. So we're starting to see sort of good momentum in all those areas. And the core productivity in our branch network, it's up about 40%. If you translate that into however you'd want to measure that, that's sort of sales per FTE per day kind of thing. Productivity is up, up significantly. As you know, that's a battleship, so that takes a long time for that to manifest itself in terms of revenue, but we're really seeing the sort of the core productivity. Wholesale side, you've seen the good growth we've had on CIB. I mean, we've been at sort of a 15% CAGR for the last few years. While I'm not projecting that necessarily, we do have a lot of really good momentum continuing in that business. CRE has officially made the turn. That business now is in sort of full growth mode and, albeit, over a smaller base. As an increment of growth, we see significant opportunities on that side. And then on our sort of core commercial and business banking side, again, we're seeing the same kind of things in terms of productivity improvements and pipelines and those kind of activities. So I'm actually pretty confident in a lot of our sort of core businesses and the measures that I look at, sort of the day-to-day dashboard of what we're doing from a productivity and production capability.

Great, Bill. And then second question on just on NII and your balance sheet, your balance sheet mix. Obviously, we know there's a little bit of NIM pressure still out there and then the eventual swap rundowns, but you had good loan growth. It seems like you're remixing a little bit on the -- from the CDs into lower costs and then securities into loans. Can you talk about earning asset mix and whether you think earning assets growth can offset the lingering NIM compression next year?

That's what we're working toward. We're -- I think we had a pretty good succes in that, as you saw this quarter, with the balance sheet increase helping to substantially offset most of the NIM decline. And next year, as the economy recovers and as general conditions get better, we are actually targeting more loan growth.

And what about securities reinvestments? Do you guys have any capacity to also build on that side, or would you rather just see it remix into loans?

Well, our first priority would be to do more business with clients. So to the extent that we've got excess liquidity, we're able to put that to work with -- into sort of real client business. That would be the first priority. To the extent that we don't get that, I like the overall mix of securities in our book today. And we'll generally keep the securities book at the kind of mix that you see today, albeit with a steeper curve now starting to provide some opportunities to invest at higher rates than we saw a few months ago.

Our next question comes from Gerard Cassidy from RBC.

Regarding your Tier 1 common levels under Basel III, I recognize you haven't been told nor have the other regional banks been told what your final Tier 1 common ratio has to be, like our large-money center banks, Citi and JPMorgan, which, of course, are 9.5%. They have given us -- they expect to carry their Tier 1 common between 10% and 10.5%, so about 100 basis points above what they're required. What kind of buffer do you expect to carry above your requirement once you get that requirement?

That's a great question, Gerard, and as you say, we don't exactly know yet. But what we do know in Basel III terms, of course, is that we're going to have to be at a minimum of 7%. On top of the 7%, there may or may not be some type of a SIFI buffer. And on top of that, we'll have to carry our own buffer just to make sure we don't go through their buffer. So when you put all of those things together, if you look out sort of long term, where would I expect the company to be running in terms of overall capital levels, when we're actually managing our capital ratios ourselves, I'd probably put a number on that, that starts with an 8%, but that'd be long term. And I wouldn't expect that when you look at us today at 9.7%, that we'd be able to reduce that number much in the near term.

Speaking of that, should we expect -- obviously, last year, you had a low combined return of capital number as percentage of your earnings relative to some of your peers that went through CCAR with you. Should we expect this year's number in 2014 to be greater than what you guys asked for last year?

The way that I've tried to address that, clearly, we don't know what the inputs are yet, so you're always hesitant about giving an answer to output until you know what the input is. But the way that I've tried to address that is to say, last year, we were very clear upfront that we were going to have a conservative bias to how we approach the CCAR process. And I think everyone sort of understood why and we did and we did that successfully. We won't have the same conservative bias as we enter into this year's CCAR process. And beyond that, I don't want to sort of get into any specifics until we just have more inputs.

And, Gerard, we're expecting those inputs to arrive within the next 4 weeks.

Our last question or comment comes from Matt Burnell from Wells Fargo Securities.

I guess a question about commercial real estate and the growth there. Jim, you were clearly pretty enthusiastic about the deal you signed recently with the Met. I guess I'm curious as to -- if there were any effects of that deal included in the above-average growth in CRE portfolio this quarter. And what should we expect to see over the next couple of quarters from that transaction possibly hitting the balance sheet?

Yes, I think it was a part of our growth and sort of incremental part of our growth. But that's a relatively new relationship, and we're building it out as we go. But it wouldn't sort of be the driver necessarily of our growth. The good news is we're sort of hitting on all cylinders, and that's one cylinder. So our REIT business, our institutional sort of what's going on in sort of our markets in terms of multi-family, office, and thus, we're sort of starting from a low base. And so we're sort of seeing all cylinders hitting at this particular point. We're up 35% since the end of last year, 10.5% this quarter at around $5.5 billion. So I just think you're going to continue to see good growth in the CRE portfolio, and a lot of that also has to do with -- that the run-off's effectively over. I mean, keep in mind, we were running that 35% growth was against $1.2 billion, $1.3 billion or so in paydowns. So we're sort of -- we're starting to see that abate, and we'll see real growth. On the -- again, on the MetLife thing, it's been a positive driver to date, but it will not be the exclusive driver. It is just one of many cylinders.

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

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