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Edited Transcript of STI earnings conference call or presentation 21-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 SunTrust Banks Inc Earnings Call

ATLANTA Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of SunTrust Banks Inc earnings conference call or presentation Friday, April 21, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aleem Gillani

SunTrust Banks, Inc. - CFO and Corporate EVP

* Ankur Vyas

SunTrust Banks, Inc. - Director of IR and Assistant Treasurer

* William Henry Rogers

SunTrust Banks, Inc. - Chairman, CEO and President

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Conference Call Participants

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* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* Geoffrey Elliott

Autonomous Research LLP - Partner, Regional and Trust Banks

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* John Eamon McDonald

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* John G. Pancari

Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD, Equity Research

* Ryan Matthew Nash

Goldman Sachs Group Inc., Research Division - MD

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the SunTrust First Quarter Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Ankur Vyas, Director of Investor Relations. Please go ahead.

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Ankur Vyas, SunTrust Banks, Inc. - Director of IR and Assistant Treasurer [2]

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Thank you, Cynthia. Good morning, and welcome to SunTrust's First Quarter 2017 Earnings Conference Call. Thank you for joining us.

In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during the call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team are: Bill Rogers, our Chairman and Chief Executive Officer; and Aleem Gillani, our Chief Financial Officer.

Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.

During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website.

With that, I'll turn the call over to Bill.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [3]

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Thanks, Ankur, and good morning, everybody. I'll begin with a brief overview of the quarter, and then I'm going to turn it over to Aleem for additional details, including our results at the business segment level. I'll conclude with some perspectives on how this quarter's performance fits into our long-term strategy and investment thesis and how the strategy is enhanced by our recent organizational changes.

We reported $0.91 of earnings per share this quarter, which after excluding the $0.04 of tax-related benefits, is up 4% compared to the prior year. At a high level, the financial performance we delivered this quarter is a direct result of investing in ourselves to strengthen our client franchise and create a business mix that delivers consistent results in different macroeconomic environments. This has been and will continue to be a key driver of our success.

More specifically this quarter, we had yet another record for investment banking income. Our investments in SunTrust Robinson Humphrey and the broader Wholesale Banking platform continue to deliver results. And it's clear that our teammates are becoming increasingly effective in working together to deliver the breadth of our capabilities to new and existing clients. Additionally, mortgage servicing, a business we grew deliberately over the past several years was up $33 million sequentially, which more than offset the decline in mortgage production.

Further, our recent acquisition of Pillar provided approximately $20 million of incremental revenue, complementing our traditional CRE lending business. And lastly, our ongoing investments in LightStream, credit card and other consumer lending initiatives are delivering profitable growth. These growth initiatives, coupled with benefits from an improved interest rate environment and our focus on optimizing the balance sheet, drove a 3% sequential and a 7% year-over-year increase in revenue.

As anticipated, expenses increased sequentially, driven primarily by seasonal uptick in employee benefits-related costs. In addition, we're making further investments in technology throughout the company to improve the client experience and drive future efficiency. As a result, our tangible efficiency ratio increased from the fourth quarter to 64.6% but was slightly better than our own expectations. And we fully expect to achieve the efficiency ratio target we set for ourselves this year.

Overall, asset quality remained strong, stable and well within our guidance. Energy-related losses declined further, which drove the reductions in net charge-offs and nonperforming loans. We continue to maintain underwriting discipline across the company, in addition to ensuring a consistent focus on portfolio diversity but which will result in further capital efficiency from a strong starting point of a 9.5% common Tier 1 ratio on a fully phased-in basis.

So with that as somewhat of a quick overview, let me turn it over to Aleem, who's going to provide some more details on this quarter's performance.

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [4]

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Thanks, Bill, and good morning, everybody. And thank you for joining us this morning.

I'll start on Slide 4 and cover our net interest margin, which increased 9 basis points as a result of the steeper yield curve, which positively impacted the securities portfolio and mortgage yields, and the increase in contractual short-term rates. The typical first quarter day count effect also positively contributed 3 basis points to the sequential improvement in margin. Net interest income increased 2% sequentially and 6% year-over-year as a result of higher rates, balance sheet growth and our continued focus on optimizing loan mix.

Looking to the second quarter. We expect the net interest margin to increase by a further 1 to 2 basis points. This is lower than the first quarter increase as the benefits from lower premium amortization expense and day count will not repeat. We will continue to manage to a moderately asset-sensitive balance sheet while being cognizant of opportunities to add durations if the yield curve steepens.

Moving on to Slide 5. You'll see that noninterest income increased 4% sequentially and 8% year-over-year. Investment banking had another record quarter and was up $45 million sequentially and $69 million year-over-year as our Wholesale Banking teammates did an outstanding job in helping clients capitalize upon strong market conditions.

Growth was broad-based across the entire CIB platform, though particularly strong in syndicated finance and M&A. As Bill mentioned earlier, the consistent growth of our CIB business is a reflection of both the investments we have been making for many years and the One Team approach that wholesale is delivering to our clients.

Mortgage-related income increased by $8 million sequentially as the anticipated declines in production income were more than offset by a $33 million increase in servicing income, which benefited from lower decay expense and recent portfolio acquisitions. As you saw this quarter, our strategic growth of the servicing portfolio, which is up 16% over the last 2 years, has diversified our revenue mix and resulted in a more balanced mortgage business.

Lastly, I note that we have introduced a new line item in the income statement for commercial real estate-related income, which is comprised of the fee income from Pillar & Cohen Financial, SunTrust Community Capital and Structured Real Estate, the latter 2 of which were previously recorded in other noninterest income. Pillar's integration into SunTrust is going very well. And the driver of the sequential decline is simply due to the normal variability of SunTrust Community Capital, where activity is typically higher in the fourth quarter.

Let's take a look at expenses on Slide 6. Noninterest expense increased $68 million this quarter, driven entirely by a $90 million increase in personnel expense as a result of the typical seasonal increases in FICA and 401(k) costs in addition to the acquisition of Pillar. We also recorded $19 million of costs related to ongoing efficiency initiatives and other noninterest expense, which is about $10 million higher than normal. These increases were partially offset by declines in most other expense categories, particularly marketing.

Compared to the prior year, our expense base grew 11% as a result of 4 primary factors: our improved business and stock price performance; investments we continue to make in talent and technology; higher FDIC premiums; and higher net occupancy costs as a result of lower amortized gains from prior sale-leaseback transactions. As a reminder, both FDIC premium expense and occupancy costs stepped up in the third quarter of 2016 and have been generally stable since then.

Separately, while our higher stock price did result in elevated incentive costs in the first quarter compared to a year ago, it also resulted in a tax benefit. The benefit is the amount by which the tax deduction per stock-based compensation exceeded the book deduction. As you can imagine, RSUs that vested in Q1 had a large amount of appreciation over the book expense due to the significant increase in our stock price over the last 6 months. Previously, this benefit would have been recorded directly to equity. But new accounting standards require these adjustments to be recorded in the provision for income taxes. All else equal, I expect this quarter's expenses to be the high-water mark for the year. For the remainder of 2017, the expense base will decline as a result of lower employee benefits costs in addition to ongoing efficiency initiatives.

Moving to Slide 7, where you see the tangible efficiency ratio for the quarter was 64.6%, which is up relative to the fourth quarter, given normal seasonal patterns in our business, and as Bill noted, is actually slightly better than our internal expectations. Given this, combined with our positive revenue momentum and the ongoing efficiency initiatives we have underway, we remain on track to achieve our goals of having a tangible efficiency ratio of between 61% and 62% for this year and sub-60% by 2019.

Moving on to Slide 8. Our asset quality metrics improved further this quarter, evidenced by the 6 basis point decline in net charge-offs and 4 basis point decline in nonperforming loans. And as anticipated, the ALLL ratio was relatively stable. Overall, we continue to expect the net charge-off ratio to remain within a range of 30 to 40 basis points for the full year and for provision expense to approximate net charge-offs, although there will always be some quarterly variability.

Let's take a look at the balance sheet on Slide 9. Average loans increased 1% sequentially, primarily due to growth in C&I and consumer. Period-end loans were flat as declines in home equity and C&I were offset by the continued growth in consumer lending. On a year-over-year basis, average performing loans grew $5.2 billion or 4% with growth across most categories. In particular, our targeted investments in LightStream, credit card and other consumer lending initiatives are driving solid loan growth and also improving our return profile as the weighted average yield of our consumer portfolio is obviously higher than our commercial portfolio.

Bigger picture, our clients are optimistic, as evidenced by the result of SunTrust's recent Business Pulse Survey, where 75% of our clients feel their own outlook is strong and many cite tax reform, infrastructure spending and reduced regulatory burden as catalysts for economic growth and their momentum. As clarity on these fronts develops, we believe our clients will be ready to invest, and we are extremely well positioned to meet their needs, given the investments we have made in our business, combined with our presence in the higher-growth Southeast and Mid-Atlantic markets.

Turning to deposits on Slide 10. Average client deposits were up 1% sequentially and 6% year-over-year with broad-based growth across most products and businesses. Our successful deposit growth strategy is the result of our commitment to meeting more of our clients' deposit and payment needs, our investments in technology platforms and ultimately our teammates in both the consumer and Wholesale Banking segments. Deposit betas remained low, which is a reflection of the relatively low interest rate environment and our strong retail deposit mix. Over time, deposit betas will normalized, but we will continue to keep our consistent focus on maximizing the value proposition for our clients outside of rate paid.

Slide 11 provides an update on our capital position. Our estimated Basel III common equity Tier 1 ratio on a fully phased-in basis was 9.5%, up about 10 basis points from the prior quarter, even after we successfully returned some of our excess capital to our owners in the form of our normal $240 million quarterly buyback, combined in Q1 with an incremental $174 million share repurchase. We submitted our 2017 capital plan earlier this month and look forward to sharing our results with you in late June. At a high level, our strong capital position, particularly in the context of our risk profile, combined with additional capital stock optimization, should allow us to continue to increase payouts to our owners.

Moving to the segment overviews. Let's begin with Consumer Banking and Private Wealth Management on Slide 12, where we are seeing solid revenue momentum. This has been largely driven by net interest income, which was up 2% sequentially and 7% year-over-year as a result of strong loan and deposit growth and further balance sheet optimization. We continue to make good progress in our consumer lending businesses as the direct result of investments to improve our capabilities and enhance the client experience.

Consumer loan balances, excluding home equity are up 16% year-over-year, which is meaningful in both the context of the company's overall growth trajectory and our return profile. Strong deposit growth continues to be another key contributor to CPWM's growth momentum with average balances up 2% sequentially and 6% year-over-year. Our ability to grow deposits while reducing the size of our branch network, which is down 6% year-over-year, is a testament to both the strength of our franchise and our clients' continued evolution toward a digitally centered banking experience.

We're aware of the importance of having a differentiated and integrated client experience across traditional and digital channels and have consequently made significant investments in each of these areas. In fact, this quarter, we introduced a new and improved mobile banking app and enhanced our online banking platform in order to increase its connectivity to our mortgage offering. In addition, we introduced a digital conversation guide for our branch teammates to help them better track and meet client needs. Noninterest income declined 4% sequentially as a result of seasonal declines in service charges and card fees. Compared to the prior year, noninterest income was down 2% due entirely to the posting order changes implemented in the fourth quarter of 2016.

In wealth management, we continue to make a strategic shift from more of a transaction-oriented business to providing managed money solutions for our clients. This has had a negative impact on recent retail investment income growth trends but provides for better long-term growth and stability for our clients and our business. Consequently, wealth management-related income was stable, both sequentially and year-over-year as growth in AUM was offset by the implications of this shift.

Expenses in CPWM increased 8% compared to the prior year, largely as a result of the investments we have been making in our digital and consumer lending capabilities, higher FDIC and occupancy costs and increased costs and charges related to branch closures. At a high level, we're pleased with the momentum across CPWM. Consumer lending is producing consistently strong growth. Deposits continue to grow meaningfully, Private Wealth Management is demonstrating better momentum and our investments in an improved client experience and more effective branch network will further strengthen our franchise.

As you see on Slide 13, Wholesale Banking delivered record revenue in part due to strong capital markets conditions but also reflective of the continued strategic momentum we're having with our clients. Revenues were up 6% sequentially and 16% year-over-year, primarily due to investment banking's record performance. Growth in investment banking was broad-based across most products and client segments, a great indicator that our teammates across the platform are gaining further traction in expanding and deepening client relationships and meeting the capital markets needs of all Wholesale Banking clients.

More specifically, M&A, a business, which takes a long time to develop and has been a key area of investment for us, had a record quarter, another proof point that our clients increasingly view us as a trusted strategic adviser. Syndicated finance also had a record quarter. While strong market conditions were a key driver, we also saw continued growth in our commercial and CRE client segments, which contributed to roughly 1/4 of the sequential increase. Total lead-left relationships are up 9% year-over-year and our average fee per transaction continues to increase. Both of these are direct reflections of our success in strengthening client relationships.

Net interest income was also a key contributor to the strong revenue growth, up 2% sequentially and 9% year-over-year as a result of improved loan yields and continued deposit growth. Noninterest expense was up 17% compared to the prior year as a result of higher compensation tied to strong revenue growth and our higher stock price, ongoing investments in technology and the acquisition of Pillar. Pillar's financial contribution in the first quarter was very much in line with our expectations with approximately $20 million of revenue, an efficiency ratio in the 80s and an ROA that was accretive to the rest of the company. Pillar, combined with our recent introduction of a longer-term financing product, continues to enhance the capabilities of our CRE business.

Overall, our value proposition in the Wholesale Banking business is clear. We deliver a full suite of product capabilities and industry expertise with a One Team approach to middle market and mid-corporate clients. This value proposition continues to resonate with our clients. And the momentum across the wholesale business remains strong.

Moving to Slide 14. We benefited from our diverse revenue mix within the mortgage segment this quarter as the anticipated decline in production income was offset by higher servicing income. Production income was down sequentially and year-over-year as a result of lower refinance activity, though purchase activity remains strong with applications up 26% sequentially and 17% year-over-year. Servicing income increased $33 million sequentially driven by lower decay expense and a larger service income portfolio. Net income was up $4 million sequentially, driven by higher servicing income. Compared to the prior year, net income was down $21 million as a result of lower revenue and a larger reserve release last year.

To conclude, let me remind you that we previously announced our strategic decision to integrate our mortgage business with the broader consumer segment. And thus, mortgage financials will be incorporated into a consolidated consumer segment slide within the July earnings presentation. We will continue to report residential mortgage production income and servicing income as components of noninterest income in the consolidated financials.

So with that, let me turn it over back to Bill for some concluding remarks.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [5]

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Okay, thanks, Aleem. So to conclude, I'm going to point to Slide 15, which highlights how this quarter's performance aligns with our overall investment thesis.

So first, we've made targeted investments in growing our client businesses and diversifying our revenue mix over the last several years. These investments, coupled with the improving interest rate environment, helped drive strong 7% year-over-year revenue growth. Or more specifically, our investments in consumer lending helped offset lower growth in others areas while also enhancing returns. Consumer, private wealth and wholesale delivered strong 6% and 7% year-over-year deposit growth, respectively, as a result of our focus on meeting more clients' deposit and payments needs. And our 10-year-plus investments in talent and capabilities across SunTrust Robinson Humphrey continued to lead to deeper client relationships and significant revenue growth.

In addition, we've made and continue to make meaningful investments in technology to modernize our infrastructure and deliver differentiated experiences, which embody our purpose, meet evolving client needs and position us for growth. In the first quarter specifically, we enhanced our consumer digital capabilities, added small business banking to our new wholesale loan origination platform, upgraded our treasury management mobile capabilities and began to conduct tests of robotic process automation across mortgage and wholesale lending. While these investments have the potential to create further efficiencies, they are, first and foremost, about delivering improved client experience with strong executional excellence.

Going forward, our opportunity set is significant, and we'll make further investments in enhancing the client experience. As Aleem noted earlier, effective April 3, we integrated our mortgage segment with Consumer Banking and Private Wealth Management to create a new consumer segment under Mark Chancy's leadership. Mark and the team already have significant momentum on which to build. And we expect to create a more consistent, integrated and improved experience for our clients across all consumer products and services, somewhat akin to the integrated ecosystem Mark and his leadership team developed in our Wholesale Banking business. Beau Cummins will succeed Mark as the leader of Wholesale. Beau most recently led the commercial and business banking line of business and previously led SunTrust Robinson Humphrey from 2008 to 2013. He's been a key contributor to the momentum that SunTrust has established in wholesale. And I have no doubt that he and his team will not miss a beat in delivering the distinct value proposition they've spent over a decade in building.

Second, we've demonstrated the consistent efficiency improvements and have plans to accomplish even more. Tom Freeman is now the efficiency and strategic partnerships executive, allowing us to provide more executive focus on large-scale efficiency opportunities, in addition to evaluating further FinTech alliances and growth opportunities. Tom's focus here gives me more confidence in our ability to achieve both our short-term and long-term efficiency objectives.

Lastly, our capital position remains strong with common equity Tier 1 ratio estimated to be 9.5%. This is even more notable when juxtaposed against our risk profile, where SunTrust demonstrates amongst the lowest levels of capital erosion in severely adverse economic scenarios relative to peer banks. This strong risk-adjusted capital position gave us confidence to repurchase a total of $414 million of common shares in the first quarter, in addition to submitting the capital plan that would result in further increased payouts and financial confidence to you, our owners.

So before we conclude, I'd be remiss not to mention that SunTrust Park, the new home of the Atlanta Braves, opened last weekend. This is the start of a 25-year partnership, and we're already thrilled with the brand exposure it offers both regionally and nationally. But this is much more than naming a ballpark. This investment allows our bank to reach more people and fulfill our purpose of lighting the way to financial well-being through programs that we will activate as well as SunTrust's on-site center called the onUp Experience. There, we'll engage fans to learn more about gaining financial confidence with fun and interactive baseball activities while also strengthening our brand as a purpose-driven, client-first company.

So with that, I'll now turn it back over to Ankur, and we'll begin the Q&A portion.

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Ankur Vyas, SunTrust Banks, Inc. - Director of IR and Assistant Treasurer [6]

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Cynthia, we are now ready to begin the Q&A portion of the call. (Operator Instructions)

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Questions and Answers

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Operator [1]

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And our first question will come from the line of Ryan Nash with Goldman Sachs.

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Ryan Matthew Nash, Goldman Sachs Group Inc., Research Division - MD [2]

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Bill, maybe I'll just start with expenses. You noted that they're going to decline from this quarter. So I just want to make sure I got the guidance right. Will they decline each subsequent quarter? And then I guess, related to that, I think the presentation noted that you're going to be closing another 3% of branches this quarter. Should we expect to see similar repositioning costs in the second quarter? And is that baked into your expense guidance?

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [3]

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Yes, Ryan, first, let me say, we sort of start with thinking about efficiency ratio on a year-over-year basis versus a quarter-to-quarter basis. So while we were up in the first quarter and overall, some of that element was due to expenses supporting our revenue growth, and then some was episodic and idiosyncratic, the FDIC posting order, stock price appreciation, Pillar, a lot of things that Aleem has already referred to as well our core tenet to continue to invest in our strategic platform. But also as Aleem said, what we said as it relates to this quarter, that's the high-water mark for both dollars and percent for this year, I mean, barring anything than we can't anticipate. And whether it's a quarter-to-quarter, we'll have some fluctuations. Some of that will be dependent upon revenue. I don't anticipate a lot more on the branch side, I mean, we've sort of done the -- as you've noted, we've got the 3%. We took most of the cost related to that in the first quarter. And I don't anticipate an additional charge related to branch closures in the additional plan that we have. And so factoring all of that in, including the rate hikes, we're ahead of where we thought we were. So if we look at our own planning right now, although the number seems higher, we're ahead of where we thought we were. And our confidence in getting to that 61% to 62% is very strong.

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Ryan Matthew Nash, Goldman Sachs Group Inc., Research Division - MD [4]

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Got it. And then maybe if I can ask one to Aleem. Aleem, maybe can you just talk about what's built in to the net interest margin in terms of further rate hikes? I think you had said last quarter, June and December. So how should we think about the margin for the remainder of 2017 if the forward curve proves to be correct?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [5]

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All right. Yes, we had originally been thinking that rate increases for '17 would be June and December. Given the March increase, we think that's a little bit of a pull-forward and maybe June and December now looks something like March and September. So that will help a little bit on a full year basis. As we said for Q2, we do expect we'll get another 1 or 2 basis points in NIM in addition to the 9 that we delivered in Q1. And if I try to look sort of full year overall, we then anticipate one more anticipated rate hike later this year. We're normally conservative in the way we think about rate hikes, but we're including that one in. If I think about full year NIM, what that's going to look like, right now we're thinking that will kind of average probably something like 3.10% or so full year.

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Operator [6]

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Our next question comes from the line of John McDonald with Bernstein.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [7]

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Aleem, just to follow up on the NIM comments there, could you just remind us? You mentioned deposit betas remain low. What exactly are you seeing in terms of deposit betas on the retail and commercial? And what kind of beta is baked into your rate sensitivity disclosures when you look ahead?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [8]

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Well, what we incorporate in our modeling, when you take a look at our asset sensitivity that you see in the release, what we normally incorporate in our modeling there is kind of a full through-the-cycle beta so that long-term investors get a good sense of what that's going to look like over the long term. And what we're thinking there pull through the cycle is about a 50% or so beta full company, full cycle. Obviously, we've been able to hold the line on liability costs so far and provide our clients with a value proposition that they see from us that's not just based on rate. The differentiation between business clients and consumer clients is apparent. Business clients, as you can imagine, with large dollars to deposit are normally more sensitive and betas there are a little bit higher. As I look forward to the rest of the year, it wouldn't surprise me if we saw overall betas for the company in that kind of 25% or so range for the remainder of this year and climbing through '18 and '19 if we get something that looks like the forward curve and if we get a sort of measured pace of rate increases from the Fed. All of this is dependent on timing of rate hikes, the competitive environment obviously and to some extent, the steepness of the curve.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [9]

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Okay, great. And as a follow-up but just on the loan growth aside, you posted some good C&I growth in a tough quarter for the industry. What are you seeing in terms of the C&I loan demand dynamics? And where does SunTrust see opportunities to grow loans this year, even if the industry trends remain sluggish?

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [10]

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Yes, I think the good news is that it's highly diversified. So I can't point to one area and say this was the particular area that accounted for the high percentage of the growth. It's really related to all the investments we've made and the strategies that we've put in place and I think directly correlated to what you see on the fee-based side because that's also evidence of the advice that we're giving clients. And I think that results in stronger asset growth. As you know, we don't sort of manage the loan outstandings as a benchmark. We look at production, we look at paydowns, utilization and pipelines. And there's some ups and downs related to all that. But all of that put together keeps us being fairly optimistic about where we can go.

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [11]

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John, as I said in my comments, the SunTrust Business Pulse Survey that we did with our business clients came back with very positive results with many of our clients. 75% are feeling really positive about their business. And just yesterday, we received the results of our CRE survey, where we surveyed 200 CEOs of CRE clients. And that was also very positive with many of them thinking that, given the message that they're hearing from D.C. and an expectation that the administration will be able to deliver on some of those promises, that their growth prospects in '17, '18 and '19 look very good.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [12]

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All that being said, we have to reflect on there's still a bit of a wait and see out there. And I don't think that's illogical, whether it's tax, health care, regulation reform. And you saw the market react pretty quickly to some comments related to tax reform. So I think there's still a little bit of wait and see out there. And we'll look to the next quarters as it relates to a potential infection point.

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Operator [13]

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Our next question will come from the line of Matt O'Connor with Deutsche Bank.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [14]

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I was hoping to drill down on the expenses a little bit. I think you said on an absolute basis, you'll decline from here to the rest of the year. And just wanted to get a little more color in terms of the drivers of that. And then specifically, it seems like the cost might have been a little inflated within the consumer segment this quarter, not only the branch cost that you called out but maybe some other stuff as well. So just trying to get a little more clarity on the cost overall, and then specifically on the consumer side of things.

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [15]

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Well, Matt, Q1 is typically a high-water mark for us anyway. So the primary reason for that in Q1 is employee benefits costs, FICA and 401(k). And the majority of the decline, therefore, from Q1 is actually going to be that bump-up in benefits costs going away. Having said that, as you pointed out, there will be other costs that I think will be removed over the course of the year. We have several efficiency initiatives that are underway. As Bill said, the effect of branch closure costs has primarily been taken early. There's still going to be a couple million here and there over the course of the year but nothing as significant as we saw in the first quarter. And some of our other efficiency initiatives are in the space of third-party management vendor costs. We've got some work going on in the area of telecommunications costs. So we expect that as those initiatives come to fruition over the course of the year that a lot of those costs will disappear.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [16]

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Okay. And then just any comment on full year expenses? I know you've given us the efficiency ratio. But as you think on an absolute basis, cost declining from here, any sense on what they might look like on a full year basis?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [17]

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Full year basis, we're very focused on the efficiency of the company. And we're happy to be able to note 5 straight years of improved efficiency at SunTrust. And looking forward for the remainder of '17, I fully expect that at the end of this year, we'll have a sixth straight year of efficiency improvement.

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Operator [18]

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Our next question comes from the line of Geoffrey Elliott with Autonomous Research.

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Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [19]

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The continued growth in indirect, I'm guessing that's driven by auto. And kind of curious there, is there an opportunity opening up as some of the other banks pull back?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [20]

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Well, I think if you're looking at year-over-year growth, Geoff, it's a little bit deceiving because of the base from last year. As you'll recall that what we've been doing with indirect over the last several years is when we see opportunities to manage our overall asset base, we've been a regular seller or securitizer of non-core or low ROA indirect auto loans. And in 3Q last year, we securitized $1 billion. So after that decline in 3Q, if you're looking at year-over-year numbers, naturally you'll see growth as a result of that sale. But having said that, when we take a look at our indirect auto right now at the end of Q1, I'm pleased actually that our overall weighted average FICO for indirect auto loans is slightly up and our overall LTV on indirect auto loans is slightly down. So if I look at the quality of our indirect auto book, I think right now it's actually pretty good.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [21]

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Yes. And maybe just to embellish that is we're not leaning in on indirect. I mean, there are places that we're very specifically leaning in on consumer lending and commercial and other areas. And what we're doing with indirect is making sure that it supports our overall businesses. And we play in that prime to super-prime area as Aleem noted. So what we see is just a good continuation of our strategy.

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Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [22]

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And then just following up on auto, I know within LightStream, you've got a pretty significant contribution from auto, most of it are unsecured. Can you give us a bit more detail on the nature of the product and the size of the opportunity there?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [23]

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The nature of the product in LightStream? They're made up of a number of different types of loans.

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Geoffrey Elliott, Autonomous Research LLP - Partner, Regional and Trust Banks [24]

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The unsecured auto, I guess, is what I wanted to focus on.

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [25]

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It is. So we've got unsecured auto there. We also have secured auto and other types of products that we've got on LightStream are unsecured and secured non-auto loans. And then we also have debt consolidation loans. So across the board, looking at the composition, I don't have in my head exactly how much is auto versus non-auto. But the total amount of the LightStream portfolio now, Geoff, is $3.3 billion at the end of the first quarter.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [26]

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Yes. The unsecured for auto is the super-prime part of the portfolio. Average FICO in LightStream is 770-something. So I mean, it's a high prime, super-prime product particularly in that unsecured area. And overall portfolio yield, north of 5%.

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Operator [27]

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Our next question comes from the line of Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [28]

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I was wondering if you could talk a little bit about credit, which as you mentioned, is in your ranges and you're not expecting to have to build or release much from here. But there was a credit out there, it was pretty fairly public. I know you don't talk about singular credits out there. But just in the context of did you see any lumpiness still in C&I? Because I'm noticing just a big decline in NPA still. And there just doesn't seem to be anything filling the bucket behind. So can you first just talk about any lumpiness that we're starting to see here on the C&I side, if at all?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [29]

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Well, in C&I, obviously that book is lumpy by nature. And so there's going to be some lumpiness as individual credits deteriorate over the course of the year. As you said, Ken, we don't reference clients by name. But you know us, we're pretty conservative. And if we see credit deterioration in any name, we're going to react. So you can expect that if there's an action that needed to have been taken in the first quarter, we would have taken it.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [30]

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Understood, well put. And then second, my follow-up just also on the consumer side. You've always pointed out that there's this nice lag between the residential delinquency and charge-offs on the home -- on that side of the book. And so can you just talk a little bit about how much more extra benefit you might still have ahead on the resi side, and then just anything to note on the consumer side just given some of the newer growth and seasoning there?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [31]

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Yes, I think most of the benefit in resi, Ken, has come through. Over the last several years, the quality of both our home equity and mortgage books has been pristine. And we've enjoyed the advantage of that type of really high-quality origination. But most of the decline in reserves that had been built in previous years has been taken. If your question is leading to where we expect the allowance to go overall, I would think that the allowance ratio for the company would be generally pretty stable within a few basis points of where we are now. And you've seen that stability from us in the last few quarters. I would expect that to continue for the remainder of the year.

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Operator [32]

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Our next question comes from the line of Gerard Cassidy with RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [33]

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I think it was back in 2014, you guys started a program for the capital markets part of your company to go after customers that were not CIB customers. Could you tell us in this quarter what percentage of the business is coming from non-CIB and how is that trending since you implemented that plan?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [34]

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Well, we'll tell you that we provide capital market services to all of our wholesale clients, including those in our commercial banking area and those in our CRE area. So we look at our clients kind of holistically and we approach them as One Team with all of the products that they're going to need, whether those are loans or capital market services. If you look at our results this quarter in the context of over an industry loan growth that's not growing, you see that our capital markets business did particularly well. And that's because we were able to provide both corporate and commercial clients with the capital market services they need. We don't really break down in detail externally how much of that comes from CRE and commercial clients. But if you want to think about at a high level, 15% to 20% of capital markets revenues come from commercial and CRE as well as private wealth clients in the context of the total.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [35]

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Yes, I'd say that overall strategy is a key part of our growth dynamic going forward. Quarter-to-quarter, it's going to fluctuate. So this quarter, it was a little down in commercial, but it was up in CRE as an example. So just quarter-to-quarter, it might fluctuate. And year-over-year, it's up substantially at the numbers that Aleem was talking about.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Great. And then a bigger-picture question, we all know the industry has changed dramatically in the last 20 years, more capital, higher efficiency ratios for yourselves as well as everybody else, which obviously means lower profitability. And the ROE number, of course, is still below 10%. ROTCE obviously is over 11% this quarter. The ROA though, it's interesting, you guys are around 93 basis points. Where do you think that goes to the ROA now with the new -- obviously, you have the LCR ratio, which hurts the profitability. What's a normal ROA once we get into a normal interest rate environment maybe over the next 2 to 3 years for you guys?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [37]

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Well, if you think back, Gerard, to you started your question with kind of where long-term normalized before for the crisis. And long-term normalized before the crisis for SunTrust, it was uncommon for us at all to show ROAs that were in the context of 1.10%. And as I look forward from here, that kind of a number would be the kind of number that we would be targeting for the company, given the business mix and our ability to deliver services to our client base today.

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Operator [38]

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Our next question comes from the line of Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [39]

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Maybe we could just start on CCAR and payout ratios. You guys have been around a 30% dividend payout ratio. Is there any comfort at this point to move that higher? And then should we think about capital return approaching 100% as we move forward?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [40]

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Thank you for the question. Yes, I think as we look at the guidance that the regulators have provided to the industry, one of the items that they've noted for main street banks like us is that the focus in CCAR this year will move to a more quantitative approach. And some of the constraints that had been placed on the industry have been moved toward those banks that require a more tailored regulation and away from banks that have more of vanilla business model like us. So given the removal of some of those constraints, we would hope to be able to an overall basis respond to the needs of our owners and change overall payouts and payout mix toward something that we think is more in the context of our long-run payout ratios and mix and what they're asking for.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [41]

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Right, that's great color. And then just switching to credit, a lot of talk this quarter on strip centers. Can you just remind us of your exposure and maybe if you are still comfortable lending into that asset class or if you pulled back?

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [42]

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Yes, maybe I'll take that and just do it in sort of the overall category of diverse -- of retail and staying thematically on inter- and intra-diversity, which has sort of been a core component of our focus for the last 5 years. So you start sort of with a big number, got a little over $5 billion, 3.5% of total loans that sort of fit into that category. Commercial real estate would be about $900 million of that. And the mall component of that would be very, very small. REITs would be about $700 million of that. Again, the mall component of that, smaller and the preponderance for all that, investment grade. And then the all other, sort of in the -- about $3.6 billion is really diversified both by geography and by product type. So it's everything, grocery, gas station, drugstores, home and furniture. But again, very, very broad-based.

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Operator [43]

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Our next question comes from the line of John Pancari with Evercore ISI.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [44]

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On the expense side, the operating losses, those higher in the quarter, can you just clarify again what drove that? And then separately on the efficiency ratio, I know you gave the guidance for FY '17 and you gave the longer-term guidance of below 60% by 2019. How do you think about '18? If you could give us a little bit of color about how the efficiency ratio could look for the year for '18.

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [45]

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All right. Well, I'll talk about operating losses first. Yes, it's a few million dollars higher this quarter. That actually relates to a legal accrual that we took this quarter on a specific instance. So that's the context of the few million dollars. Efficiency ratio, John, what we try to do is we try to improve every year. So in 2017, our intent is to get to somewhere between 61% and 62%. For 2019, our intent is to get below 60%. There are several people who just draw a straight line between those 2. That's not our guidance, but that's what several people do. And in the context of we try to improve every year, we'll try to improve in '18 from '17.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [46]

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Okay, all right. And then separately on the loan growth front, could you just give us a little bit more detail on the decline on an end-of-period basis that you saw in overall commercial? And is that just some of the reluctance in the wait-and-see attitude that's showing up there? And how soon could we see a pickup there on C&I? And then did you actually quantify your utilization rate and what the actual pipeline did for the quarter?

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [47]

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Yes, let me try to hit some of those. So I think yes, the answer is it's a little bit of a wait and see, but it's also a little bit of the capital markets. I mean, those are related. So there was opportunity for clients to take advantage of capital markets. And it was a good environment, good rate environment, good appetite. And the good news is we benefited on that side of the equation from that standpoint. As it relates to the utilization, it's just slightly up. So I think slightly is a really important thing. Utilization over the last 5 years has been pretty flat. I mean, any quarter can be slightly up or slightly down. I think it's tricky to get too much of a read into that. Pipelines, if we look at some of the early stage pipelines, they're really good. There are lots of conversations. There's proactive desire to want to do some things. People have got stuff on the drawing board. If we look at later-stage pipelines, they fall under that wait-and-see category. They're slightly down. So if we put all that in the balance, I think it's consistent with everything we've said.

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Operator [48]

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And that will be from the line of Erika Najarian with Bank of America.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [49]

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I just wanted -- one question, just wanted to zoom out on the landscape for a bit. Bill, there seem to bipartisan support to amend the official SIFI buffer to $250 billion. And I wonder if -- with SunTrust at $204 billion assets, if that does get passed through Congress, does that change how you're thinking about inorganic growth versus organic growth opportunities?

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [50]

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Well, I think -- I like to think about this as an efficient frontier. And you sort of find out where you are on the efficient frontier. Today, we think we're in a great place on the efficient frontier. We're big enough to absorb all the cost that we need to do from a regulatory standpoint and also make the investments we need to make in our business. What we've talked about is sort of tailored regulation in concept. So while there is some dialogue around official levels, there's also a lot of dialogue around risk-based establishment of capital levels that wouldn't be dependent upon necessarily an asset level. So the net of all that is if -- we'll be in the athletic position to move to wherever the ball goes. And if $250 billion is a hard line, then we'll look at our strategies. We're several years away from that. So we've got time and capacity to build and do the things that we need to do. And we'll adjust and define our strategies based on where they land. But right now, I think we're in really the perfect place. We've got a risk-based model that's a lower risk-based model and that we're at an asset size that allows us to really compete highly effectively. And under any sort of threshold, I think we'll be sort of under the thresholds versus over the thresholds.

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Operator [51]

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And that will come from the line of Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [52]

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So just wanted to follow up on some questions about credit, any other areas that you're seeing any early signs of concern? I know we've seen some health care credits maybe show some weakness this quarter, especially on the syndicated side of things. Any changes that you guys are making to concentrations in certain areas?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [53]

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Steve, we're actually very pleased with what we're seeing in the credit landscape right now. If we look across all of our businesses, our exposure to the clients that we'd like to have is just about perfect in the context of client mix, loan mix. And looking across, we're not seeing areas of weakness across any one of the businesses in which we focus that would worry us to any material level at all. Now having said that, I might have just jinxed us. So I'm knocking on the table right now. But right now, talking with our risk folks and our frontline folks, they're feeling really good about what they're hearing from clients and what they're seeing in the industry.

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William Henry Rogers, SunTrust Banks, Inc. - Chairman, CEO and President [54]

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But it also just undermines when times are good is when you plan the most. And staying really committed to the diversity of our business model is critical. So if we do see one pocket, whether it's one credit or one geography or one issue, we want to be in a position that, that doesn't impact our long-term objectives and opportunities.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [55]

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Okay, that's fantastic. And then just one follow-up on the loan growth, do you guys still think you can grow kind of a pace of 1 to 2x GDP in the longer term? And maybe do we need a specific catalyst here in the nearer term to see something that more approximates that in the next couple quarters?

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Aleem Gillani, SunTrust Banks, Inc. - CFO and Corporate EVP [56]

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Well, our ability to grow, I think, at north of GDP is well proven. We've got the infrastructure, we've got the product base, we've got the teammate talent, we've got the client mix to be able to continue to do that. And I would fully expect that we'll continue to be able to do that. Now of course, that's not in any given quarter, there's going to be quarterly volatility. But as I look out sort of year-over-year or through the cycle, yes, I fully expect that we're going to be able to grow north of GDP, even north of GDP in our footprint. And our footprint has shown good ability to grow north of national GDP.

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Ankur Vyas, SunTrust Banks, Inc. - Director of IR and Assistant Treasurer [57]

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

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Operator [58]

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Thank you. And ladies and gentlemen, that does concludes our conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.