Solidion Technology Inc. (STI) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the SunTrust Third Quarter 2015 Earnings Conference Call. At this time, all participants will be in a listen-only mode until the question-and-answer session of the call. [Operator Instructions] Today’s conference is being recorded. Any objections, you may disconnect at this time. Now, I would like to turn over the meeting to Ankur Vyas, Director of Investor Relations. Thank you. You may begin.

Thanks, Angela. Good morning and welcome to SunTrust’s third quarter 2015 earnings conference call. Thank you for joining us. In addition to today’s press release, we have also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed on our website at investors.suntrust.com. With me today, among other members of our executive management team are Bill Rogers, our Chairman and Chief Executive Officer and Aleem Gillani, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures when talking about the company’s performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and in our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast are located on our website. With that, I will turn the call over to Bill.

Thanks, Ankur and good morning everyone. I will begin with a brief overview of the quarter then I am going to turn over to Aleem for some additional details. Following Aleem’s comments, I will review our performance at the business segment level. We delivered strong results this quarter as we made further progress against our key strategies, which include optimizing our business mix and balance sheet, investing in growth opportunities, improving efficiency and increasing our capital return to shareholders. Earnings per share, after excluding $0.11 of non-core items, were $0.89 and up a solid 10% compared to the adjusted level a year ago. Our active balance sheet management and optimization efforts improved our overall earning asset and funding mix, resulting in an 8 basis point improvement in net interest margin and $44 million sequential increase in net interest income. Period-end loans were up 1% driven largely by growth in higher return consumer portfolios resulting in a more diversified and profitable loan mix. We remain confident in our ability to generate additional and targeted growth in segments where returns are appropriate when we can have deeper relationships. However, we will continue to closely manage areas that are not meeting our thresholds and according with our goal of improving the overall returns of the company. Average deposits were up 2% sequentially as our core growth initiatives continue to gain momentum. Growing deposits, while also maintaining appropriate pricing discipline, remains an important part of our strategic efforts to strengthen client relationships and improve profitability. In addition, our strong deposit growth has allowed us to significantly reduce our higher cost wholesale funding over the last 6 months. The sequential decline in non-interest income was driven by lower capital markets and mortgage production income, primarily the result of a strong second quarter, but also the result of challenging market conditions during the third quarter. Relative to the prior year, adjusted non-interest income increased 2% primarily due to our continued success in meeting more of our clients’ capital markets needs. This is further evidence of our differentiated wholesale banking platform and the positive returns we are realizing on our investments in this segment. Expenses were stable relative to prior year at down 5% versus the prior quarter. While some of the sequential decline was nonrecurring and seasonal in nature, we continue to carefully manage expenses given this revenue environment. Our performance this quarter resulted in an adjusted tangible efficiency ratio of 61% for the third quarter and 62.9% year-to-date. As you all know, we have been working diligently toward our goal of sub 63% for the full year and we took another step in the right direction this quarter. Improving efficiency remains a strategic priority with a long-term goal of being sub 60%. Our asset quality performance continues to be very strong with NPLs down 4% and the net charge-off ratio declining 5 basis points to 21 basis points. This performance can be attributed to the significant actions we have taken over the past several years to de-risk, diversify and improve the quality of our loan production. However, we also recognize that our provision expense is at very low levels and will eventually normalize. Our capital position improved slightly with our common equity Tier 1 ratio estimated to be 9.9% on a Basel III fully phased-in basis. We are able to improve our capital position, while also returning nearly 60% of our earnings to shareholders this quarter. So to recap, we delivered solid bottom line results that further enhance shareholder value this quarter with return on assets and return on tangible common equity increasing to 1.1% and 12.8% respectively and tangible book value per share increasing 4% sequentially. Our strategies of optimizing our business mix and balance sheet, investing in growth opportunities and improving efficiency continue to yield positive results, creating value for our clients and shareholders. So with that as an overview, I am going to turn over to Aleem to provide some more details on this quarter’s performance.

Thanks, Bill. Good morning, everybody and thank you for joining us this morning. Earnings per share in the third quarter, was $1 even, which compares to $0.89 in the previous quarter and $0.81 on an adjusted basis last year. We recognized $0.07 of discrete tax benefits this quarter, which were recorded as a lower provision for income taxes in addition to $0.04 of discrete recoveries related to the resolution of previous mortgage matters, which were recorded in non-interest expense. Excluding these non-recurring benefits, earnings per share were $0.89 and relatively stable to the second quarter as higher net interest income and lower non-interest expense were mostly offset by lower non-interest income. Compared to the third quarter of last year, core earnings per share grew 10% driven by a lower loan loss provision, higher capital markets and mortgage-related income and solid loan and deposit growth. All of which helps to counteract the 9 basis point decline in the net interest margin during that time frame. We will now review the underlying trends in more detail starting on Slide 5. Net interest income increased 4% sequentially driven by lower premium amortization expense in the securities portfolio, lower wholesale funding and higher commercial loan swap income. Each of which is a reflection of our continued efforts to actively manage and optimize our balance sheet. Net interest margin improved 8 basis points, primarily due to the same factors that drove the increase in net interest income, in addition to improved core loan yields and loan mix. Relative to the guidance we provided in July, NIM was higher-than-anticipated as we retired higher cost wholesale funding and core loan yields were firm, albeit for just one quarter so far. On a year-over-year basis, net interest income was fairly stable as the declines in earning asset yields were largely offset by growth in earning assets and also by the reduction in wholesale funding, which was in turn driven by the strong deposit growth we generated over the past year. Looking ahead, we expect fourth quarter net interest margin to be relatively stable to the third quarter. Despite the expected stability next quarter, NIM will likely grind down in 2016 as long as interest rates remain low. Overall, we continue to manage the balance sheet to where net interest income would benefit from a rise in short-term rates, while also ensuring we carefully manage our risk to lower-for-longer scenarios. Moving on to Slide 6, non-interest income decreased $63 million from the prior quarter, primarily driven by the expected decline in capital markets related income given the record second quarter, coupled with increased market volatility in the third quarter. Investment banking income was $115 million in the third quarter, down $30 million sequentially, but up $27 million compared to the prior year. Lower high yield and equity origination fees were the primary drivers of the sequential decline, while the strong year-over-year growth was driven by most product groups. In particular, M&A, a business we continue to grow as a result of building deeper client relationships and increased expertise. Trading income also declined in the third quarter as wider credit spreads and elevated volatility resulted in reduced client activity and lower valuations of inventory. Mortgage production income declined $18 million, primarily due to the anticipated decline in refinance volumes. Gain on sale margins were also lower though primarily as a result of changes in channel mix. Conversely, mortgage servicing income increased to $10 million due to lower decay expense and higher levels of core servicing fees as a result of continued steady growth in the servicing portfolio. We also recorded $7 million in net securities gains and $11 million of debt extinguishment costs, which are recorded in non-interest expense to slightly reposition the balance sheet. Net, these transactions had a minor upfront negative P&L impact, but will modestly improve our forward NIM and net interest income. Compared to the third quarter of last year, adjusted non-interest income was up 2% as growth in capital markets and mortgage-related income offset the decline in service charges and trust and investment management income. Moving on to expenses, non-interest expense declined $64 million sequentially due to lower personnel expenses in addition to discrete recoveries recognized in the third quarter. Personnel expenses declined $31 million due to the higher levels of incentive based compensation recorded in the previous quarter given strong business performance as well as declines in benefits costs and FICO taxes, some of which is seasonal. Operating losses and other non-interest expense benefited from $20 million and $12 million, respectively of separate discrete recoveries related to the resolution of previous mortgage matters. This was partially offset by an $8 million increase in marketing expenses due to higher advertising costs. Compared to the second quarter of last year, adjusted non-interest expense declined slightly as lower operating losses and personnel costs were partially offset by higher outside processing and software expenses. As you can see on Slide 8, the adjusted tangible efficiency ratio improved to 61.0% in the third quarter, down 90 basis points from the last year. Year-to-date, the adjusted tangible efficiency ratio is now 62.9% and puts us on track to achieve our full year goal of being sub-63%. For several years now, we have been committed to becoming a more efficient and effective company and we are highly focused on continuing to make progress toward our long-term efficiency ratio goal of sub-60%. Let’s turn to credit quality on Slide 9. The net charge-off ratio was 21 basis points, down five basis points from the prior quarter and 18 basis points from the prior year. Non-performers also declined slightly and now represent 35 basis points of loans. While overall asset quality conditions are likely to remain favorable in the near-term, future quarters will be impacted by discrete situations and sectors, given the current low levels of net charge-offs and non-performers. The allowance for loan and lease losses and the ALLL ratio declined $48 million and five basis points respectively compared to the previous quarter. These reductions were driven by the continued improvement in asset quality. Provision expense increased slightly as lower net charge-offs were offset by higher loan growth and a smaller reserve release. With regard to our energy portfolio, we took further action this quarter to build additional reserves given the decline in commodity prices. As this portfolio represents only 2% of total loans with less than half of this portfolio in the E&P and oil field services sectors, our risk here remains very manageable. Similar to the guidance we provided in the previous quarter, we will [Technical Difficulty] fourth quarter provision expense to increase sequentially, but be lower than the fourth quarter of 2014 as a result of our efforts to improve asset quality. Looking into 2016, we expect provision expense to more closely match net charge-offs as the improvements in asset quality will abate. Wholesale, net charge-offs are likely to increase from here as we do not believe the third quarter level is sustainable. Ultimately our reserves will be determined by our rigorous quarterly review process, which are informed by trends in the loan portfolio combined with a view on economic conditions. Let’s turn to balance sheet trends. Average performing loans were relatively stable due to the $1 billion auto securitization we completed in June. Period end loans were up almost 1% relative to June 30 with growth across most loan categories. C&I loans declined slightly as growth in a number of industry verticals and client segments was offset by continued elevated pay downs and further reductions in lower return portfolios. On a year-over-year basis, average performing loans grew $2.5 billion or 2%, driven by 6% growth in the C&I portfolio and $1.7 billion of growth in our consumer direct book as a result of continued momentum in our LightStream business and GreenSky partnership. The growth in C&I and consumer direct loans was partially offset by continued pay downs in the home equity portfolio and reductions in indirect consumer loans given the competitive environment in auto lending. Going forward, we continue to seek opportunities to help finance our clients’ growth plans, particularly given the solid economic conditions in our markets. Production trends and pipelines remain healthy and we will continue to keep a high focus on improving returns and ensuring new business exceeds our cost of capital. Turning to deposits on Slide 11, average client deposits were up $2.4 billion or 2% compared to the prior quarter and 10% compared to the prior year driven by growth across most lines of business. We continue to be pleased with the momentum on the deposit front. Our success here reflects our overall strategic focus on meeting more clients’ deposit and payment needs, supplemented by investments in technology platforms and client facing bankers across both the consumer private wealth and wholesale segments. In particular, our corporate liquidity product specialists within wholesale banking are doing an outstanding job of deepening client relationships with our treasury and payments product offerings. And as Bill noted earlier our strong deposit growth directly enabled us to reduce higher cost long-term debt by $4.6 billion over the past six months. Our broader enterprise wide focus on deposits was also evident in the recent release of FDIC deposit market share data where SunTrust grew faster than the competition and increased our national market share by four basis points. Importantly, the strong growth we have delivered has not resulted in any adverse changes in rates paid or mix. Low cost deposit growth continues to be strong, while higher cost deposits continue to gradually decline. As interest rates rise, some of these trends will normalize. However, we will maintain a disciplined approach to pricing with a focus on maximizing our value proposition for clients. Slide 12 provides an update on our capital position. Common equity Tier 1 expanded by approximately another $250 million during Q3 as a result of growth in retained earnings and the estimated Basel III common equity Tier 1 ratio on a fully phased in basis increased to 9.9%. Tangible book value per share increased 4% from the prior quarter, driven by growth in retained earnings and higher unrealized gains in the securities portfolio. We repurchased $175 million of common stock and paid $0.24 dividend in the quarter per our 2015 capital plan. Our liquidity coverage ratio continued to exceed the January 1, 2016, 90% requirement. Lastly, I would like to highlight the credit rating upgrade we received from Fitch Ratings last week, which was a reflection of our improved earnings profile, strong asset quality performance and balanced and diversified business model. Our credit ratings across all three major rating agencies have generally improved over the past year, which is positive for our teammates, clients and investors. With that, I will now turn things back over to Bill to cover performance at the business segment level.

Great, thanks, Aleem and I will start on Slide 13. Our Consumer Banking and Private Wealth Management segment continue to demonstrate solid steady growth this quarter. Net income was up 7% over prior year driven mainly by lower provision expense. Core operating performance was also solid as pre-provision net revenue increased 2% compared to the prior year and 3% sequentially. Net interest income continues to steadily improve in this segment that bodes our balance sheet optimization efforts aimed at improving returns and deposit growth momentum. Average loans were stable sequentially as growth in higher return portfolios, including consumer direct and credit card, offset the impact of the $1 billion auto securitization in June. Deposits were up 6% year-over-year with growth being driven by continued execution of our strategy of deepening client relationships, particularly in our mass affluent and high net worth segments. Our premier bankers in SummitView platform are examples of where our investments in talent and technology have accelerated our growth. We also introduced new checking account packages in August, simultaneously simplifying and improving our product offering in addition to increasing our value proposition to students and families, consistent with our company’s purpose of lighting the way to financial well-being. Non-interest income was down marginally compared to the prior quarter and year. Service charges remained pressured as client behavior continues to change. Wealth Management related income declined modestly this quarter given market conditions, which resulted in lower assets under management and reduced transactional activity. Irrespective of short-term market fluctuations, many more of our clients wealth and investments needs, continues to be a strategic priority for the company. Expenses in this business have been well-controlled and we have been using efficiency gains to invest in client-facing technology and talent. We continue to generate solid returns from our digital investments with steady increases in mobile penetration, digital sales and self-service deposits with the latter representing now 26% of total deposits received in the third quarter. Bigger picture, the progress we have made of optimizing the balance sheet, meeting more client needs and investing in technology has helped offset the negative impact of the prolonged low rate environment. The economies in our Southeast and Mid-Atlantic markets continue to perform well and we are uniquely well-positioned to meet the growing needs of each of our client segments. So, let’s go to wholesale next, which has been a key growth engine for the company and had a solid quarter despite challenging market conditions. Total revenue was down 6% relative to the prior quarter, but up 12% compared to prior year. The sequential quarter decline was driven by lower capital markets related income primarily because we were coming off a record second quarter, but also due in part to market volatility in the third quarter. Investment banking had a third highest quarter ever and was up 31% compared to a year ago. M&A investment-grade bond originations and equity sales and trading all had strong quarters, each a reflection of the strategic investments we have been making to expand and diversify our capabilities. Strength in these product areas help to mitigate declines and high-yield bond and equity originations driven by elevated market volatility. Trading income was lower this quarter as choppy market conditions led to increased volatility, wider credit spreads and reduced client activity. Net interest income was up 6% year-over-year driven by strong loan and deposit growth though this was partially offset by a decline in spreads. Average loans declined 1% sequentially and increased 6% year-over-year. We continue to generate solid growth across a number of industry verticals and lines of businesses. However, this has been offset by elevated payoffs and intentional reductions in lower return areas. While the overall lending environment remains competitive, we have seen more stability in portfolio and production yields over the past few months. Production and pipeline trends are healthy and we remain focused on generating profitable growth both for SunTrust and our clients. Deposits were up 5% sequentially and 18% year-over-year with broad-based growth across all major lines of businesses. Our strong performance here can be attributed to enhancements in our treasury and payment product offerings, the success of our liquidity specialist in CIB and increased intensity in meeting more of our wholesale client needs on the deposit front. Provision expense grew relative to the prior quarter and prior year as we continue to proactively increase the energy portfolio reserve given the decline in oil prices in the third quarter. With that said, SunTrust exposure to the exploration and production in oilfield services sector, which are the more severely impacted by decline in oil prices continues to represent only 1% of our total loan portfolio. Overall, asset quality in Wholesale Banking and the company continues to be very strong. Non-interest expense was up 6% over the prior year largely due to the continued strategic investments in CIB and improved business performance, but more importantly, wholesale’s overall efficiency ratio improved relative to last year. We believe our Wholesale Banking business is highly differentiated as we bring large bank capabilities and a One Team approach to mid-corporate and middle-market clients. This differentiation has led to continued growth and left lead relationships both with corporate and commercial clients giving us continued optimism in the long-term growth outlook for the Wholesale Banking segment. Moving to the market segment where bottom line performance was aided by approximately $50 million of non-recurring benefits, which Aleem discussed earlier. Excluding these benefits, mortgage still had a solid quarter as continued expense discipline and further de-risking, combined with a larger servicing portfolio and an improving purchase market mitigated the anticipated decline in refinance volumes. Revenues were relatively stable sequentially as higher servicing income help to offset the decline in production income, a reflection of the balance between servicing and production, particularly during periods of elevated refinance swings. Our servicing portfolio is up 12% compared to a year ago due largely to portfolio acquisitions as we view performing servicing as a core competency and a solid ROE business. On a year-over-year basis, the decline in revenue was primarily driven by $41 million loan sale gain in the third quarter of 2014. Excluding this gain, revenue was generally stable as higher non-interest income was generally offset by lower net interest income due to a decline in loan spreads and the prior year loan sale. Mortgage production income increased 29%, largely due to increased purchase activity in our markets as consumer confidence continues to steadily rise and the housing market recovers. Total applications increased 20% compared to the prior year with purchase applications up 15%, evidence of the continued rebound in the housing market in addition to lower rates. Asset quality improved this quarter if net charge-offs and nonperforming loans continue to be on the downward trajectory, resulting in further declines in the residential mortgage-related allowance. And given the quality of new production combined with stable to improving housing markets, we would expect overall asset quality in the mortgage business to continue to trend favorably, but not necessarily at the level or pace of recent quarters. Expenses were lower both sequentially and year-over-year due primarily to discrete recoveries in the current quarter related to legacy matters. Excluding these items, expenses are still well-controlled as cost-saving efforts and reduced credit-related expenses have generally offset growth in production-related cost in investments and technology. Big picture, after years of operating and credit-related challenges, the mortgage business has become a more steady contributor to bottom line performance of the company, has also improved its focus and execution around creating a better client experience and delivering the entire bank to our mortgage clients. So before I conclude, I want to highlight our announcement yesterday regarding certain management changes. These changes align top talent with significant opportunities at our company and this will help sharpen our focus and enhance our growth prospects. Tom, Brad, Jerome and Dorinda are all seasoned executives and I am confident in their individual and collective capability to lead their respective units and deliver on our purpose of lighting the way to financial well-being. So, to recap the third quarter, we made solid progress against key strategies, including optimizing our business mix and balance sheet, investing in growth opportunities, improving efficiency and growing our capital return. Our active management of the balance sheet has resulted in an improved net interest income and margin. At the same time, while our asset quality performance is strong, current levels of provision expense are not sustainable in the long-term. Year-over-year non-interest income trends are solid and reflective of our strategy to meet a wider array of client needs. In addition, we are mindful of the intense expense discipline required to operate in this environment and also to support continued investments in our company. Overall, I remain optimistic about our company’s strategic direction and our ability to deliver further value to our clients and shareholders. So with that, let me turn the call back over to Ankur and let’s take some Q&A.

Thanks Bill. Angela, we are now ready to begin the Q&A portion of the call. As we do so I would like to ask participants to please limit yourself to one primary question and one follow-up so that we can accommodate as many of you as possible today.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Question comes from Ken Usdin with Jefferies. Your line is open.

Great. Hi, good morning guys.

Good morning.

Good morning.

Aleem, you are establishing a nice new seasonality of being able to really show expense control in the third quarter of each year. I know some of that is related to some of the comp-related fee businesses. But I know you get this question every quarter, but can you talk to us about, is this finally formally kind of a new sub 13 bar and what pressures would you see if any to kind of take you back up off this level?

Well, thank you for noticing Ken. No, I wouldn’t say that our bar is a sub-13. I think when you think about the revenue base that we have here, core expense level of around 1.3 is about right for us as I say, at this type of revenue – this type of revenue level. But as you know, we are really just more focused on the efficiency ratio rather than on the expense number itself. And as long as we can continue to grow revenue, we are not averse to growing expenses as long as it helps revenue at a better pace and we improve our operating leverage and efficiency ratio. If we do get revenue growth in the next year or two, I wouldn’t be surprised to see expenses move up, but continuing our trend of becoming a more efficient company. If revenue stays where it is, then think about expense levels around $1.3 billion sort of give or take.

Okay, got it. And my follow-up just is on this overall size of the balance sheet is really now flattened out for a good couple of quarters and you have had the sales that look like maybe they finalized out and you are kind of where you are and beyond on the securities book. So do you expect much growth at some point here on the average earning asset side or is there still more churn to happen from the mix perspective?

Well, from a mix perspective, there is still going to be I think, some change as we continue to try to grow our direct consumer business as well as focusing on higher return businesses across the other segments. So I think you will see a little bit of mix change still happening. We are continuing to try to work and optimize our balance sheet in every one of our businesses. In terms of overall balance sheet growth and loan growth, it will – we haven’t had much loan growth in Q2. We are starting to see it pick up again a little bit in Q3. Looking forward, I wouldn’t be surprised to see loan growth kind of at the pace we saw in Q3. That’s not an unreasonable level given the relatively low economic growth that we are seeing across the country. I think the other place we might see some growth in earning assets, if you think about moving through ‘16, perhaps will be in the securities book as we need to move from sort of 90% LCR compliance rate to 100% compliance rate in 2017. And that might require some additions in HQLA and securities and you might see some growth in earning assets, but of course that will also help on the net interest income side as we grow assets.

Understood. Okay. Thanks Aleem.

Our next question comes from Erika Najarian with Bank of America.

Yes. Hi, good morning.

Good morning. Hi, Erika.

Hi. Just to follow-up to Ken’s question. This management team has clearly done an excellent job managing down this efficiency ratio, but the market expectation for revenue growth for the industry seems to be tempering for 2016. And I am wondering relative to your long-term goal of below 60% efficiency, what the decision is in terms of let’s say the Fed raises very slowly or doesn’t raise at all in 2016 on sort of what – where are you going to attack the efficiency ratio the most aggressively, whether it’s still numerators side and maybe taking down that $1.3 billion quarterly level or are you confident in what you are doing on the revenue side for next year and that there is some offset there?

Erika, let me start that with sort of I think the Fed part of your question there and then maybe Bill can talk to you about the efficiency ratio approach that we have got overall. We, as you know in our case, we have sort have been in the lower for longer camp for some time and set ourselves up appropriately for that type of an approach. As we look forward into ‘16, I think also lower for longer stays, I think if there are Fed increases, they will be very deliberate and the pace of rate rise will probably be slower now than the market had been thinking six months ago. Having said that again, we are setting ourselves up so that we benefit from that type of an approach. In terms of expenses relative to revenue, we will continue to try to improve the efficiency of the company. We have been on a path now for many years. We are going to continue to be on that path. And we understand that we need to get better. So to the extent that we don’t get a tailwind from rate rise, we will be looking at other ways to grow income, whether that is net interest income or non-interest income. And we will be looking for ways to manage expenses such that our efficiency ratio continues to keep us on that path of becoming more efficient.

Maybe a good way to look at it is sort of tale of two cities. If you look at our two largest business segments, if you look at our consumer private wealth segment, it’s more rate dependent. So it has more rate variables to it. And you can see there that the top line growth in left, but we have continued to manage expenses and increase efficiency. Then you sort of shift to wholesale, which is less rate dependent and you see there that we have continue to grow the business at sort of good double-digit kind of revenue numbers and continue to increase efficiency. So the answer is to all the questions is yes. I think we want to be able to grow the business where we can grow it and all along being focused on the efficiency side. And if we see opportunities to invest and that increases expenses, while at the same time improving efficiency, we are going to do it. If we don’t see those opportunities then we are going to grind down a little harder on the expense side. And that will literally be a line of business by a line of business kind of analysis and diagnosis.

That’s clear. Thank you.

Next question comes from Ryan Nash with Goldman Sachs.

Hi, good morning guys.

Good morning, Ryan.

Maybe I could ask one of the questions that was asked in a little bit of different way. So when I think about the outlook of NIM grinding lower a little bit, we shouldn’t expect too much balance sheet growth just because of the strategy that’s being pursued. So, on the revenue side, we are left with obviously growing fee income, but how do we think about the continued management of the asset liability management in terms of continuing to add more swaps. And then I guess related to that, despite the fact that it looks like you might have added some stocks, the asset sensitivity did go up a lot. So, can you just walk us through the puts and takes of what happened, I am assuming you have something to do with prepayment speeds in the mortgage business?

And maybe for you jump into the harder part of that question, I want to be clear we don’t have a strategy that doesn’t have growth in our balance sheet. So, what we want to do is optimize our balance sheet and business mix. So, where we see opportunities for growth in the balance sheet that are positive contributors to that strategy, we are going to absolutely take advantage of them. We haven’t seen as many of those in the last couple of quarters. So, we don’t have a flat balance sheet type of strategy. We have an optimized balance sheet business mix and more importantly, focus on growth and return strategy. And maybe with that said, Aleem, let me turn over to you.

Sure. Well, thanks for the question, Ryan. Look, when I think about the swaps book, Ryan, I sort of think about it as the tail wagging the dog. And if you think about our overall loans, our natural position on loans is 60% of the loans that we generate and 60% of the loans that we produce are floating rates. And so that naturally makes us more and more asset sensitive every month as we continue to do new business. The tail part of this is all the swaps do is take about 12% to 14% of those floating rate loans and effectively turn them into fixed rate loans. So, in the context of our overall book, it’s sort of the smaller part of that. And what we will do with the swaps and securities and which loans that we produce to emphasize and which loans we deemphasize really is going to be economy dependent, client needs as well as our view of the structural balance sheet and structural rates. So, the swap component ends up being a pretty sort of smallish part of that decision process.

Got it. And if I could ask a follow-up on credit, I think both of you made comments, I think, Bill you said something to the extent of an eventual normalization and Aleem, you said something about 20 basis points of charge-offs not being sustainable. And I guess as you look out if rates end up staying low, you guys have done a great job de-risking the balance sheet. How should we think about a more reasonable level of charge-offs if we stay in a similar kind of environment and what does that eventually mean for the loan loss provision?

Well, as we think about our overall risk profile and sort of the medium-term outlook through the cycle expectation line for charge-offs is in the 40 to 70 basis point range. So, that’s what we are setup for over the medium to long-term. So given that we are only half of the floor of that range right now, we will take the 21 basis points we have today is sustainable. Having said that, obviously, I don’t think we are going to go from 20 to 40 in the quarter. But I do expect that as we go into 2016 and ‘17, we will probably see charge-offs start to move back up again into that range. I think one example to think about there to really bring it home is when you look at our C&I book. Today, we have got charge-offs in that book of less than 10 basis points, a single-digit basis points in a book where historically our average is more like 50 or 60. And so clearly in C&I, single-digit basis points won’t be sustainable as the economy normalizes.

Got it. Thanks for taking my questions.

Thanks.

Next question comes from John Pancari with Evercore ISI.

Good morning.

Good morning, John.

Hi, John.

Just back to the loan growth real quick on the C&I side and sorry if you touched on this, but just wanted to get a little bit more color behind the decline in the C&I balances end of periods of what drove it? And what would your outlook be for C&I in coming quarters given what you are seeing in the markets in the Southeast?

Yes, that’s sort of a quarter-to-quarter thing. I mean, we have had, in core areas, we have seen really good growth, healthcare, TMT, corporate banking, I mean, those numbers on an annualized basis are up 30 and plus kind of percent. So, we have got a lot of cylinders that are running at a high base. And then at others, we have just had some pay-downs. I mean, we have had sort of a significant level of pay-downs that have been maybe different than we have experienced in the past. And then as I said earlier, there is something that we just said on the margin that’s just not really creating profitable value for us. So, we are just not going to play in that arena. So, I clearly think C&I will have positive growth. I mean, I think this is – it’s a one quarter deal. Sort of over time, you have seen that. We have got 6% growth year-to-year based upon what I see with pipeline, based what I see in growth and unfunded commitments, based upon I see with new clients and all the things that are the health metrics of our business, I would expect C&I will continue to grow, but it will just be on a quarter-by-quarter basis based on sort of the same kind of example, we will look at each individual business within that and sort of make determinations. But I don’t think we are in a flat environment in C&I growth maybe that’s the best way to summarize that. We will grow over time.

Yes, that’s helpful. The pay-downs is that – what parts of C&I are you seeing that more concentrated in?

Yes, we have seen that in a couple of different areas. We have seen in our asset securitization area as a good example where we have had significant pay-downs. Clearly, on the CRE, we have seen significant pay-downs in that and most of those are positive. They are refinancing. There are companies that have moved to investment grade. So, they are paying down their loans. Their company is on the CRE side that they are moving out of the construction phase much faster. So, the quality of what we are doing is supporting it. So, it’s not pay-downs that we are viewing is sort of a negative correlation, it’s sort of positive. So, it’s a number of different places.

Okay. And then lastly just wanted to get color on the non-interest bearing deposit balance and again sorry, if you already touched on this, I missed a part of the call, but I know the non-interest bearing balances were down 3% linked quarter and year-over-year as well. So, just want to get some color on what drove that?

Well, I think that’s just a reflection of client behavior and client needs. It looks like clients are looking for liquidity. They want daily liquidity. And as they grow balances in each of their accounts, we have had this history of client behavior over the last several years where in order to avoid fees on their accounts and manage their money better our clients are consolidating accounts and keeping more dollars in each of their accounts. And as they are doing that, they are starting to move into accounts that give them daily liquidity as well as the opportunity to earn something. So, I think that’s just a reflection of client behavior.

Got it. Alright, thank you.

The next question comes from John McDonald of Bernstein.

Hi, good morning. Wondering if you could explain what drives the premium amortization income? What led to the decline this quarter, Aleem? And did you mention how much that contributed to the NIM expansion this quarter?

John, I didn’t mention it, but premium amortization this quarter declined by about $15 million and what drove that mostly was some remixing we did within our securities portfolio at the start of Q2 and that helped a little bit in Q2 and it helped more in Q3. At this kind of level, I would expect general stability in premium amortization. As I said, it improved by $15 million from Q2. Just so you have the number in your head, the actual amortization in Q3 was $45 million and I would expect as long as sort of rates are generally here to sit within that $40 million to $50 million range in amortization.

Okay, thanks. And then just a bigger picture follow-up, you guys have been executing really well. Your ROA the last nine months has been about 1%. You have got an ROTCE to about 12%, just under 12%. What are your longer term goals, Bill, in terms of where you think the ROA and ROTCE should be for this company as you think out of few years?

Yes, we have been careful about not having a specific external goal, but clearly, I think over time, we are a north of 1% ROA company. That will actually be increasingly hard in the short-term. So, that’s going to – the degree of difficulty actually is going to change in the short-term on that. But I think what you are seeing is that we have got the kind of company that’s got the ability to be north of 1% ROA. And then on the ROTCE, similarly, I mean, I think sort of continue to sort of ratchet up as we think about where we need to be. Can you get back to those lofty numbers of 15%? I don’t know. That’s a lot of rate dependencies sort of pre-crisis dependencies on those. But I do think we have got we are going to continue to ratchet up even in this environment.

Okay, thanks.

And John if I take sort of a longer term view of your question, if I think back pre-crisis, SunTrust was sort of averaging ROA of about 1.2%. So, I see no reason why over the long-term we can’t be a 1.2% plus ROA company.

Okay. Thanks guys.

Next question comes from Marty Mosby with Vining Sparks.

Thanks. Wanted to ask you two questions, one is on the capital markets activities, you gave about $50 million, a little bit more than $50 million this quarter. I am just curious if all the uncertainty and disruptions in the marketplace if you didn’t see some embedded activities or possible revenues as you move forward kind of stuck up in the pipelines out there in those businesses?

Yes. There is clearly some of that, Marty. But let’s keep in mind we are also year-to-year up 30%. And we had an unbelievably great second quarter. So part of the give up is we are just coming off a great second quarter. We had a lot of the things in the part of the business that are I would consider to be core like syndications held up well. M&A had another really good quarter and pipelines are still good there. The volatility numbers are in sort of high yield bonds and the equity sales and trading and that’s better. Spreads have come in. I think things will get done more this quarter than they did last quarter if things stay stable. And based upon what I see in terms of our pipeline, I feel good about our pipeline. And I feel good about our pipeline again particularly in those sort of core areas. So what we saw in the decrease I saw was primarily related to specific volatility rather than any sort of chink in our strategy. And then as you highlighted it also creates opportunity and creates opportunity for a bank like ours.

Aleem, I have got a tougher question for you and the sense of…

Good, well, Marty why are saving the tough one for me.

When you look at the mortgage portfolio, you had to work hard with a lot of pain to allow for potential losses that were weighted to the big event that we had in the financial crisis and the unusual losses that we had in the portfolio. Now that we are on the backside of that and we have changed all the underwriting and now we are looking at a portfolio that’s going to perform more like it did historically with very low losses expected for the foreseeable future without the risk of those big kind of spikes up, how do you think about allowing for that, because you are releasing reserves, but you had to put away a lot and should probably look at further benefits from that as you move forward?

Well, that is a great question actually Marty. If you would look at the mortgage segment slide that we have got in the deck, you do see we are actually releasing reserves. We have got a negative provision in that book this quarter. And as you look around the rest of the industry, you see I think kind of the same thing with the mortgage books and sort of home equity books generally looking better and better every quarter that we get away from the crisis with a lot of those reserves that have been set aside for those books starting to become apparently no longer required. And as that becomes more and more apparent over time, it’s possible as you say, that we will continue to require fewer reserves for that book and you could see negative provisioning against that. However, against that if I think about the C&I book and my comments earlier about C&I charge-offs being at extremely low levels, I do expect that we will see increased charge-off and reserving required in C&I over time and to some extent that ought to offset the benefits that we are getting on the mortgage side.

Appreciate it. Just over time can be defined in different ways and been in periods where you had very low losses, especially in C&I books for not quarters but years and so you may not see the timing of that if you don’t have event like energy to offset it going forward?

Let’s see, Marty if that happens. We will be happy.

Thank you.

Next question comes from Matt O'Connor with Deutsche Bank.

Good morning.

Hi, Matt.

Good morning, Matt.

Bill, you have been talking about preferring to invest in SunTrust given the big opportunity organically versus doing deals, but I am wondering, with the combination of the improvement you have had on your expense base, ROA on the balance sheet optimization and then sort of macro factors out there in terms of both lower rates and likely slower growth for some time, is that thought process changing to where you may be more open to M&A and if not what needs to happen to be more a little more constructive on doing deals?

Yes. I mean I think you have quoted me accurately, which I appreciated. And I still think the best opportunity is within SunTrust in terms of where I see the investment. And I still think we have significant opportunity for growth. And I also think we have efficiency opportunity. So I don’t think we sort of run the string all the way out there that we are sort of looking for the next thing. All that being said, to the extent that we did get involved in anything it would be likely to be smaller fill in that would complement an existing line of the business or a product gap or something where we just saw we had a chance to enhance what we are doing rather than any large scale M&A.

And would that apply just to key businesses or some openness in terms of geographic fill in bank deals as well?

Yes. I mean if there was something interesting, I mean obviously on the geographic side, a lot of things that we would do, would dilute our franchise. And we want to make sure that we don’t do anything geographically that dilutes the opportunities we see. I mean we have got states like Florida and North Carolina and Georgia, which are three of the top then job growth states in the country right now. So we are in a lot of the right places where we want to be for the next phase. So again, it could be I am not limiting that to fee business, but again if it were it would be fill in and not large scale at this point.

Okay. Thank you.

Angela, we have time for one more question.

Our last question comes from Gerard Cassidy with RBC.

Thank you. Good morning guys.

Good morning.

Good morning Gerard.

Aleem, can you come back to the C&I portfolio, you were saying that you are seeing some firming in pricing in the last month or two, can you give us some color where you are seeing that and what you think is causing it?

Yes. Gerard I think what we are seeing there is that as you know over a long period of time, the loans that we have been putting on have been at lower yields than the loans that we have had that have been rolling off or paying down. And I think that that long-term several year consistent trend is starting to ease, partially because our overall portfolio yields are moving down. And so we are at a place now with the loans that are coming on are not as much lower in yield terms as they loans that are rolling off. So while there are still lower, I want to be clear about that, they are not as much lower and sort of that kind of firming is helping our overall portfolio. I think also we have been pretty explicit about trying to make sure that where we are not getting the returns that we expect to get, where we are being very careful about those relationships and managing our balance sheet as a precious resource. I think our teammates are very focused on that and so if we are not getting the returns we are sort of trying not to do that kind of business.

Yes. I would say we wouldn’t want to underplay or overplay that comment. It just is a – it’s a reversal of a trend. So it’s not as important to discuss that, that in this quarter, we saw some difference in that trend. I think as Aleem said, it’s probably some combination of our own discipline and selection process at some combination of portfolio mix and probably some market issue, some widening bond spreads and sort of how do they reflect in terms of what we see in terms of production.

Thank you. And then as a follow-up, I think everybody in the call agrees with you about the outlook for credit, it’s been great for you and the industry. And then question is on the C&I portfolio, Aleem you talked about I think the charge-offs now down to 10 basis points and over time you think they will go back up to a more normal number, 50 to 60. And the question is, is it so good today because of some ultraconservative underwriting standards you guys had 3 years or 4 years ago or – and then as we go into the future we head into a recession and that pushes it up, what’s going to be the driver behind the normalization of credit losses?

Well, Gerard I don’t know that our – I would characterize our underwriting standards as ultraconservative. I think we play in a market along with many other competitors and that market is what it is. However, I think that as a country, as an economy overall, we have all benefited from the increased liquidity that many corporations and increased capital that many corporations have placed within their companies and their portfolios. I think one of the other benefits also that you see for SunTrust and perhaps for the industry overall is the benefit of CCAR. The CCAR has changed the way that companies think about their overall risk. They apply a stress test to all their portfolios now and think about how portfolios would behave during a stress test. One of the benefits for SunTrust specifically is how good we look in CCAR. We are a top decile performer. We have managed our portfolio very carefully and that’s what’s helping our particular charge-off numbers right now look as good as they do.

Thank you for this insight. Thank you.

Angela, this concludes our call. Thank you to everyone for joining us today. If you have any further questions, please feel free to contact the Investor Relations department.

Thank you for your participation in today’s conference. Please disconnect at this time.