SunTrust Banks Earnings Call Nuggets: Loan Demand and Mortgage Repurchase Reserve

SunTrust Banks (NYSE:STI) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Loan Demand

John Pancari – Evercore: Can you give us a little more color on loan demand in the quarter, particularly around – I know you mentioned the pipeline picked up but also the trending commitments and the line utilization as well on the communication side.

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William H. Rogers, Jr. – Chairman and CEO: Yes. I mean, you pointed out we really did see, over the course of the quarter, the pipeline starting to increase and refill from the fourth quarter. Where we end the quarter is a pretty robust pipeline compared to what we’ve seen in the past, so we feel good about that. On utilization, the utilization is slightly higher this quarter than the trends but down from the fourth quarter. So fourth quarter was obviously up in utilization, but it is a little bit better than sort of the prior quarter’s, multi-quarter’s average. Then commitments are up slightly as well. So part of the forward look as the pipeline’s built, utilization’s okay, and we have seen an increase in commitments as well.

John Pancari – Evercore: Then on the environmental cost side, can you talk to us a little bit more about the credit related cost trend going forward from here? You saw a nice decline in those costs on the operating losses in the credit related expenses, and it seemed to imply in your prepared comments that we shouldn’t expect material declines in a couple of those areas going forward. So can you just kind of wrap it all together in terms of the overall outlook for environmental costs in the next several quarters?

William H. Rogers, Jr. – Chairman and CEO: Maybe I’ll take it a high level, and then, Aleem, you can embellish with mine. But we’ve – remember, we talked about sort of setting a target for those costs or trying to talk about those costs in general sort of being in the $325 million range, plus or minus. Clearly, the first quarter was below that. I think sort of similar to the comments on the efficiency ratio, we feel just much more solid about that number on an ongoing basis. As Aleem pointed out, some costs like OREO being zero, they’ll come back to some level, some level that will be below where it was in the past, those costs now are primarily sort of CRE related. We’ve sort of run-through a lot of that. So the backlog is not very substantial but you’ll see that bumpy as it goes through. Collection expense is going to continue to grind down and we’ve seen that pretty consistently now and that will continue to be on a quarter-by-quarter grind down basis. Probably not as fast as we’d all hope, because we’ve got some issues as you know in Florida and we take it slower but I’m confident that we’re on the right flight path of grinding those down. Aleem, I don’t know if you want to add anything?

Aleem Gillani – CFO: So you’re right, we previously guided to $325 million, sort of plus or minus $50 million for that line and I’m more confident that it’s in the minus now. So it’s clearly on the right track. Bill pointed out OREO, let me give you just a little color on OREO. The reason it was zero this quarter is we actually had some gains on sale that offset some of the regular activity there. So wouldn’t expect zero again, but you clearly also wouldn’t expect the sort of $50 million run rate type number that you saw in the past. Then on the operating cost number; that can be lumpy. In any given quarter, we might get a regulatory assessment or a legal accrual or specific operating loss. That number can be lumpy up or down, and in the fourth quarter we had an accrual in there which we lost this quarter. So you’re going to see some ups and downs, but I think the $325 million minus guidance is probably the better place to think about this.


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Mortgage Repurchase Reserve

Keith Murray – Nomura: Could you just walk me through the $190 million reduction in the mortgage repurchase reserve, you mentioned resolution activity, just what specifically was that and could there be more coming down the pipeline?

William H. Rogers, Jr. – Chairman and CEO: The mortgage repurchase reserve is the way we put back together quarter by quarter is we take a look at all of the demands that we get coming in from the GSEs, and we evaluate those by sort of delinquency rate, severity, vintage and model what we think our sort of total cost is going to be in the future. We’ve actually provided, I think, some really good transparency in the past around our modeling process and how that number is put together. Back in the third quarter we put in place a relatively high provision and raised the size of the reserve to what we thought would be sufficient to cover all of the repurchases from the GSEs for pre-2009 loans, and now as we’re going through resolution activity with the GSEs after making that large one-time provision and contribution to the reserve, those resolutions are now drawing down on the reserve on a regular quarterly basis. So, I would expect to see the reserve continue to decline over time as we continue to resolve GSE demands.

Keith Murray – Nomura: Then, just a question, when you were talking about the impact on net interest margin from the swap income, is there an offset on the 7 billion or of CDs that mature this year? Is that baked into your thoughts there?

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William H. Rogers, Jr. – Chairman and CEO: Yeah, but over the course of the next three quarters, we’ve got about $4 billion of CDs maturing, and we expect to get a little bit of benefit from that as some of those clients will probably not renew into ongoing run rate CDs but may keep their money a little bit shorter term. But we also have about another $4 billion of CDs maturing in the first three quarters of next year. Next year, those CDs that are rolling off are actually at relatively high rates, and we expect to get some benefit from that, too. So overall, we are going to keep trying to grind down deposit rates and manage our liability costs, but I don’t expect to get much of a benefit from the CDs maturing this year, more so next year.

A Closer Look: SunTrust Banks Earnings Cheat Sheet>>