Solidion Technology Inc. (STI) Q2 2007 Earnings Report, Transcript and Summary

Welcome to the SunTrust Second Quarter Earnings Conference Call. All parties will be in a listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to Greg Ketron, Director of Investor Relations. Thank you, sir, you may begin.

Good morning, and welcome to SunTrust Second Quarter 2007 Earnings Conference Call. Thanks for joining us this morning. In addition to the press release, we have also provided a presentation that covers the focus for our call today, updates on the progress for shareholder value initiatives including our efficiency and productivity program, the impact they had on the second quarter of earnings and a summary of key credit trends. The press release, presentation and the detailed financial schedules are available on our website SunTrust.com. This information can be accessed directly today by using the quick link on the SunTrust.com home page entitled Second Quarter Earnings Release or by going to the Investor Relations section of the website. With me today, among members of our executive Management team are Jim Wells, our Chief Executive Officer and Mark Chancy, our Chief Financial Officer. Jim will start the call with a discussion around our progress on the shareholder value initiatives. Mark will follow with details on the quarter's earnings and the impact the initiatives had on the company's financial performance and I will conclude with details around recent credit trends and how they impact our view on the credit picture for the remainder of this year. We will then open the session for questions. First, I will remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainties and actual results could differ materially. We list the factors that might cause actual results to differ materially in our press release and SEC filings, which are available on our website. Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made, and we disclaim any responsibility to do so. During the call we will discuss some non-GAAP financial measures in talking about the Company's performance. You can find a reconciliation of these measures to the GAAP financial measures in our press release and on our website. Finally, SunTrust is not responsible for and does not edit or 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 let me turn it over to Jim.

Thanks, and good morning, all. As you saw on our press release this morning we reported earnings per share for the second quarter of $1.89, which include a $0.41 per share benefit from the gain on the sale of the 4.5 million shares of Coca Cola stock. Excluding the gain, earnings per share was $1.48 for the quarter. Mark Chancy will be discussing the details of these results shortly, but in summary, excluding the impact of the Coke gain, the company generated strong revenue growth of nearly 14% over the first quarter on a linked annualized basis. Growth was driven by double-digit increases in net interest and fee income and that coupled with strong expense control, generated positive operating leverage for the quarter. It's helped to offset higher credit cost. Significant progress we made on the initiatives to drive shareholder value, which we announced in mid-May had of profound impact on the quarter's results. As you may recall, we announced in May that we have recently accelerated and expanded a number of strategies designed to enhance shareholder value. These are summarized on page two of the earnings presentation, as well as the progress we've made on each one of them. As we discuss the progress and the impact of each of these initiatives it's having on our financial performance, I think you will get a sense of the dedicated and detailed effort the company is making to ensure that we are successful in each of these areas and the commitment we have to drive higher shareholder value. Balance sheet management strategies along with investments in our high growth business helped by revenue growth in the quarter and our E-squared initiatives were largely responsible for keeping expense growth minimal. The positive operating leverage generated in the quarter helped offset the impact of higher credit cost, related to the normalization of credit trends from historically low levels and the negative impact that deterioration of certain segments of the consumer real estate market is having on our credit costs. Greg will spend some time on credit later on the call. I will spend my time today, outlining the significant progress we made on our efficiency and productivity initiatives. Mark will then follow up with a discussion on the positive impact that the balance sheet management and capital optimization strategies that had on the quarter. As we began the implementation of the E-squared initiatives, it become evidence that we could go deeper and faster than our initial projections indicate. our momentum to-date and analysis confirm this, and as a result we significantly expanded the initiative. We increase the targeted cost savings to $530 million for fiscal year 2009, which is depicted on page three of our presentation. This represents over 10% of our current expense base. In addition, we accelerated the implementation of this initiative with expected savings in 2007, increasing from a $135 million to $181 million, and in 2008 from $205 million to $350 million. We’ve already had a high degree of success with this program. As you can see on page four of the presentation deck, our cost savings in the first and second quarter totaled $80.6 million with $51.8 million in cost savings achieved in the second quarter alone. Let me take a minute to walk through some of the recent initiatives and wins associated with this program, specifically in the areas of corporate real estate, process reengineering and organizational review. These are depicted on page five of the presentation. Our recent decision to accelerate our E-squared initiatives and ultimately to drive greater shareholder value is due in part to early successes in several initiatives. First I will talk about corporate real estate. Our work in corporate real estate is an excellent example of how we are achieving significant cost savings by rethinking how we do things across the footprint. In rethinking how we utilize office space, we are effectively reducing our utilization by over 20%. Our corporate real estate efforts are aimed at using office space more efficiently by identifying and eliminating under utilized space and employing new space standards as well. All new buildings are being built with these revised standards and we are retrofitting existing buildings to our new space standards in an orderly and systematic manner. We've completed four large property transactions that involve both sell and lease back transactions as well as renegotiated longer-term leases. The most recent of these is the sale of our Laurel Maryland office building, which closed in late June. The space planning evaluation reveled that we could reduce our square footage requirement in that one building by about 35%. That transaction coupled with those completed and mentioned earlier in Atlanta Memphis and Orlando, represent aggregate annual savings of about $13 million or 50% per year. Furthermore on June 15, we announced our intent to employ a sale and lease back strategy involving approximately 475 facilities throughout our southeast and in our mid-Atlantic footprint. This strategy will lower overall occupancy expense and reduce under utilized office space. We are currently marketing the 49 office buildings and 425 retail branches to developers, brokers, real estate investment trust and other institutional investments. There are currently almost 500 registered interested parties that represent a balance of institutional, private and individual investors. Final bids are due by late September and we anticipate closings to occur by the year-end. Next I’d like to take a moment to discuss progress reengineering. For example, we have recently begun our process reengineering efforts around the wholesale and credit side of the company. We've formed what we are calling credit resource centers that will transform the commercial lending process. These credit resource centers or CRCs will leverage existing capabilities, infrastructure and processes to provide a streamlined and centralized loan closing and application process for clients with total borrower exposure of 2.5 million or less regardless of the customer revenue size. As a result of streamlined credit processes, our clients, employees and shareholders can expect to see an improved client experience and the elimination of the administrative task from the relationship managers, which will free them up to focus on client management and new client acquisition. We’ll also see reduced headcount and expenses. Bottom line, it will be much easier to do business with us, both internally and externally, and costs will be reduced. Our first pilot of this concept was in the Central Florida region and it has been quite successful. We’ve recently rolled out additional pilots in the Georgia, Central Virginia, and Western Virginia regions and expect similar positive results there. And we expect to roll out this new process to the rest of the organization by year-end ’07. The third E-squared initiative that has recently made significant progress is our organizational review, which is in full swing and is on track to meet our end summer timeline. In fact, we’ve already announced the changes that will affect our geographic unit. In June, we unveiled a fine tuning of that structure moving from four groups and 20 regions to more efficient three groups and 17 regions structure. In addition to addressing the group and region structure, we introduced the more efficient approach to layers of management and spans of control. We are also centralizing several back office operations and functions that have historically been performed at the region or group level and we will thereby gain consistency as well as scale. So in summary, successful execution of our efficiency and productivity program is already yielding a reduction in the rate at which our core expenses are growing. And you can see this outlined on page six of the deck. As we noted previously we need the fund certain costs related to implementing the program. These expenses offset a portion of the achieved cost saves and we expect the proportion of investment to total growth saving will decline in 2008 to 2009. The total implementation cost incur this quarter amounted to approximately $12 million, bringing implementation cost incurred thus far in 2007 to just over $26 million. As we previously articulated, these costs are for the most part, exclusive of severance expense. We should have greater insight as to the amount of severance expense, what amount will occur as it relates to our organizational review efforts between now and late August. And we plan to update the pubic then on these developments. I am very pleased to announce that excluding the impact of the initial implementation cost and some additional items that are not part of our core expense base, which we show on page six, expenses were up less than 1% in the first half of 2007, compared to the first half of 2006. This is a reflection of the powerful impact that E-square initiatives are already producing. Including those noted items, expenses were up 2% over the same timeframe. Our efforts are aimed at improving efficiency in productivity, but not at the expense of our revenue generating capability. It is increasingly important to ensure that we continue to invest in areas, where we believe we have the greatest revenue growth potential. Mark will spend a few minutes outlining how these investments helped drive revenue growth in the quarter. So in summary, we are very focused on growing revenue, controlling expense growth by driving higher cost savings and making the balance sheet more efficient as well as optimizing our capital structure and therefore retuning a high rate of capital to our shareholders. The accomplishment of these objectives is how the company intends to drive higher shareholder value, as we move forward. With that I will turn the call over to Mark, who will give you some insight on the progress we made on the balance sheet and capital management strategies and the impact they had as well as other details on the quarter. Mark?

Excuse me. Thanks, Jim and good morning. As Jim noted in his outline on page seven of our earnings presentation, we reported earnings per share of $1.89 for the second quarter this morning which included a $0.41 benefit from the gain on sale of 4.5 million shares of stock. The after tax gain on the sale was a $146 million; so excluding the gain, earnings per share was $1.48. Jim has covered our progress on the cost savings front and the positive impact it is having on controlling expense growth. The purpose of my conversation will be centered on our other initiatives, namely the balance sheet management and capital optimization strategies, and the impact that they had on the quarter. I'll also highlight some of our other developments that occurred, which impacted our results. I'll start with the balance sheet management strategies that we executed in the first and second quarters. As you may recall we announced in our first quarter earnings call that we initiated a substantial balance sheet reposition. Given the challenging economic environment with no improvement in sight, the company intensified its balance sheet management efforts in the first quarter. A comprehensive review of the company's loan and investment portfolios was conducted in which we analyzed a number of portfolio characteristics, including size, liquidity, customer collateral needs, credit and interest rate exposure and capital consumption. The conclusion was that it would be advantageous to significantly reduce the overall size of the loan and investment portfolios, as well as modify the company's investment portfolio to reduce the amounts of securities with credit exposure, increase the use of short term government securities to satisfy those collateral needs, chip the [ph] portfolio of securities it will have lower risk ratings to consume less Tier 1 capital and increase the use of derivatives to manage duration and overall interest rate risk. We also decided to view loan classes through the same type of lens in determining whether to hold them in portfolio or sell them into the secondary markets. As a result of this review we decided to sell approximately $16 billion of available for sale investment securities. Purchase $5 billion in mortgage backed securities with a longer duration and place them in the AFS portfolio and purchase approximately $7 billion in short term T-Bills that would be held in the trading account, pledging needs and the customer deposit and repobo [ph]. In addition to this, we entered into $7.5 billion of receipt fixed interest rate swaps to maintain the company's overall balance sheet duration. On the loan side the company reduced the size of its corporate loan book by approximately $2 billion, restructured asset sale of lower yielding large corporate loans. In the mortgage portfolio, $4.1 billion of adjustable rate mortgages were transferred to loans held for sale for subsequent sale in the second and third quarters. And these transactions were all completed with the exception of only approximately $1 billion of the mortgages that had not been sold by the end of the second quarter. This repositioning had a significant effect on the company's second quarter results. And I'll start with the impact on fully taxable equivalent net interest income which increased $32 million or 11% on a sequential annualized basis over the first quarter. The increase was driven by the yield enhancement achieved for the repositioning, as well as reducing the level of higher cost wholesale funding for de-leveraging the balance sheet. The average yield on the $16 billion in securities sold was approximately 4.6% and the yield on the mortgage backed securities, T-Bills and receipt fixed interest rates swaps that we purchased ranged from 5% to 5.9%. Mortgages sold in the second quarter had an average yield of approximately 4.95%, below the 5.35% incremental wholesale funding rate. The combination of the yield improvement and the de-leveraging accounted for nearly all the growth in net interest income during the quarter. As a direct result of these actions, net interest margin also improved 8 basis points to 3.1% in the second quarter, the second consecutive 8 basis points sequential quarter increase. A number of key financial metrics also improved as a result of the repositioning, coupled with the impact of our cost save initiatives, as you can see on Page nine of the presentation. Looking at these ratios without the impact of the Coke stock gain, return on assets, return on equity and the efficiency ratio, all improved. Another improvement that is not as visible in the quarter end numbers is the amount of capital flexibility we gained from the repositioning and the sale of the Coke stock. Although the estimated Tier 1 capital ratio at the end of the second quarter did not change significantly from the first quarter level, we estimate that Tier 1 ratio was approaching 8%, as we completed most of the repositioning during the second quarter. Given our Tier 1 target of 7.5% this provided us with a significant capital management opportunity which we exercised through an accelerated share repurchase agreement the company entered into in the second quarter with $800 million in shares repurchased on June 7. Company also purchased roughly 50 million in stock through open market purchases during the quarter prior to the AFSR. In connection with the accelerated share repurchase, 8 million shares repurchased in June and up to 1.7 million additional shares will be repurchased upon completion of the program dependent upon the stock price during the period the AFSR is open which is now expected to conclude in late August. $850 million in total shares repurchase falls squarely within our stated goal of repurchasing $750 million to $1 billion in shares this year, as part of our shareholder value initiatives. As you know, historically the company has returned 70% to 80% of its earnings to shareholders through a combination of dividends and share repurchases and this is our long term goal going forward. In 2006, we exceeded this target by returning over 90% of our earnings to shareholders and we expect to be near this level this year through a combination of a 20% increase in our dividend and the shares that we have repurchased. Future repurchases this year will also be dependant upon any additional capital flexibility in the remainder of the year through balance sheet management activities and could be influenced by the ultimate strategy we pursue regarding our remaining Coke holdings. Now regarding Coke, during the quarter as you know we sold part of the capital inefficient portion of our holdings. Now that's the portion that we deemed that could not be leveraged in our business, doesn't receive any current capital credit from the regulators or rating agencies and wasn't pledged for other business purposes. We spent a good deal of effort analyzing various options during the quarter for the remaining holdings in the context of capital optimization and at the end of the quarter, we held nearly 44 million shares with an after tax value of approximately $1.4 billion. We are still in the process of evaluating options including tax advantage strategies and we'll continue to study these alternatives over the coming months as well as work with the various constituencies we need to, including our regulators and the rating agencies to get the appropriate feedback as we finalize our strategy. As we announced in May, we will be providing details to the investment community around our ultimate strategy by year-end, if not sooner. But at this point we are not in a position to discuss any specifics regarding the ultimate resolution. Now I am going to shift gears and take a few minutes to cover key trends in other areas, starting with the balance sheet and loans in particular. Balance sheet management strategies that have resulted in loan sales masked the true rate of loan growth the company has generated. Since the second quarter of 2006, the company sold nearly $10 billion of mortgage, student and corporate loans. Excluding this impact, underlying loan growth was solid in the second quarter of 2007 compared to the second quarter of 2006 as it was on a sequential annualized basis. Growth was fairly evenly distributed across loan categories with the exception of indirect loans, which we had been intentionally running down based on their lower risk return profile given where spreads have been in that business over the past couple of years. We've also intentionally slowed mortgage growth over the past three quarters given tightening spreads and the concentration of mortgages on the balance sheet. Although consumer and commercial deposit growth was only 1% on both the year over year basis and a sequential quarter basis, we did see growth in demand deposits of 8% and NOW account balances of 5% on a sequential annualized basis, areas where we have been focused on our deposit initiatives. Whether this increase is sustainable is difficult to tell at this point, as we typically experienced a degree of seasonality that negatively affects the balances in these products in the third quarter. Nonetheless the growth was beneficial to our results during the second quarter. Part of our deposit strategy is core checking acquisition, and we have promotions this fall especially designed to attract consumer and business core checking accounts and to cross sell deeper into existing households. Now shifting to the income statement. I have already covered the reasons for net interest income growth. The other side of the revenue equation, non-interest income grew nicely, both year over year and on a linked quarter basis. Non-interest income grew 32% over the second quarter of 2006; if we exclude the impact of the Coke stock deal non interest income grew about 5%. On a sequential annualized basis, non-interest income excluding the impact of the Coke stock grew about 19%. Solid growth was evident across most categories. As we have outlined previously, the Company is making investments in areas where we believe to have the greatest revenue growth potential in the future and we are seeing the impact of these investments in certain areas. We have been investing in certain high growth segments of the wealth and investment management segment of our business. And as a direct result of these investments, made to expand our sales force, we significantly expanded annuity sales thereby pushing retail investment income higher this quarter. Investments made in debt capital markets helped drive solid growth in investment banking income as both syndicated finance and securitizations were up strongly this quarter. Furthermore, mortgage related income grew significantly over last quarter, also reflecting investments made during the past few years in this business. I will spend a moment outlining mortgage related income shortly. Other items of note that helped drive growth in non-interest income include interchange fees, which drove part the income and gains on private equity investments and structured leasing transactions, which contributed to other non-interest income growth. Regarding the gains on private equity investments, we realized a $23 million gain on one private equity investment transaction. Taking into account the related expense on the transaction, the net pretax impact was $9 million… $19 million or $12 million after tax. The decline of $74 million in trading income from the first to the second quarter is mainly attributable to the net positive impact that the fair value adoption for certain areas had on trading income in the first quarter. The sequential quarter decline interest income is due to the merger of Light House Partners into Light House Investment Partners in the first quarter of 2007. Excluding this impact there would have been a low double digit annualized sequential quarter growth in trust and investment management income. The last area I will cover in non-interest income is mortgage related. Mortgage production related income is up $73 million from the first quarter due to a number of factors. Fair value adoption in the first quarter negatively impacted production related income by approximately $44 million in the first quarter, an impact that we had indicated would not be repeated in future quarters. Taking this into account, production income was still up $29 million over the first quarter and the increase was driven by a number of things, including record mortgage production of $18 billion in the second quarter, a 21% increase over the first quarter. Income associated with the sale of nearly $3 billion in portfolio loans held at fair value and the benefit from the election in May to record certain newly originated mortgage loans held for sale at fair value. Now, this election impacts the timing of recognition of origination fees and costs as well as servicing value. Specifically, origination fees and costs, which had been deferred and recognized as part of the gain or loss on the sale of the loan are now recognized in earnings at the time of origination. Servicing value, which had been recorded at the time the loan was sold, is now included in the fair value of the loan and recognized at origination. So, while mortgage production related income benefited from the adoption, a partial offset to this was the $12 million increase in non-interest expense, more specifically, compensation expense, as we no longer defer origination costs on these loans. The negative impact on non-interest expense was reported on page six of the presentation that Jim covered earlier. Mortgage servicing related income was up $10 million due mainly to a gain on sale of MSRs totaling $11.6 million in the second quarter. Given the continued growth in our MSR asset, which has grown 24% or $29 billion to over $150 billion over the past year and the recent increase in interest rates, this was an opportune time from both a risk management and market standpoint to realize a portion of the gains that we currently had in this asset. I will note that the gain we took in the second quarter was lower than the gains we took in the first, second and third quarters of last year. It is also the first MSR gain we have taken in 2007, compared to the $66 million in total gains that we took during the course of 2006. The sale is consistent with the approach that we took during 2006 that is, selling what we deem to be higher risk areas of the servicing portfolio, such as excess servicing rights for servicing that is out of footprint. We would expect going forward that we will continue to view this on an opportunistic basis and as part of our balanced business approach in the mortgage line of business. So, to sum it up, the shareholder value initiatives that we have undertaken had a significant positive impact on our performance in the second quarter. And we expect this will continue in future periods as we make additional progress in areas we have already identified and diligently pursue additional opportunities, going forward. That covers the earnings picture. So I will turn it back to… over to Greg to discuss the credit environment.

Thanks Mark. The preview of the credit highlights for the second quarter is included on page 10 of the presentation. Although the companies credit picture continues to be solid, we did see credit losses continue to normalize in addition to the negative impact from the deterioration of certain segments of the consumer real estate market during the second quarter. Annualizing that charge-off to total loan increased from 21 basis points in the first quarter to 30 basis points in the second quarter and did exceed our expectations for the quarter. As a result, we have updated our net charge-off expectations for the year, which I will cover later. We have stated in our external discussions there over the past several quarters, we have been expecting normalization in credit loss levels and have seen that plateau over the past year. Trends in net charge-offs to total loan has been increasing from a historically unsustainable loss rates in the first half of 2006, when they were running in eight to 10 basis point range. The net charge-off level has suddenly increased from that point to the 30 basis point level we reported this morning. As I noted, the net charge-off ratio did exceed our expectations for the second quarter. Our expectation was that the net charge-off ratio for the quarter has grown somewhat above the high-end of our outlook range for 2007 of 20 basis points. The $6 billion in mortgage and corporate loans sold and/or designated for sale late in the first quarter resulted in a smaller average loan base for the second quarter, and had the effect of increasing the annualized net charge-off ratio one to two basis points. The remainder of the increase was driven by three areas, commercial, home equity loans and residential mortgages, most notably in Alt-A products. Increase in commercial charge-offs, which includes corporate and commercial loans was driven by the need to charge off several smaller commercial and corporate credits during the quarter. By their nature commercial charge are volatile. In the last quarter, we experienced a high number of these smaller credits being charged off in prior quarters. To give you a feel for the relatively small size of the individual credits that carry the highest near-term loss potential, net accruals loans in the company’s commercial portfolio, the average size of the 25 largest non-performing commercial entity is only $3.3 million. These loans represent 90% of our total non-performing commercial loan base. To sum up the commercial credit picture, what occurred in the second quarter may not necessarily be indicative of the trends in commercial charge-offs going forward. The overall credit quality of the portfolio continues to be solid. Again, predictability and the timing of loan specific charge-offs makes it difficult to predict how aggregate quarter-by… how the aggregate quarter-by-quarter trend would look. Home equity loan annualized net charge-offs were 64 basis points in the second quarter. They have followed the trend somewhere to the overall net charge-off levels coming off unsustainably low levels of 11 basis points to 12 basis points in the first half of 2006 and steadily increasing from that point. Part of this trend can be attributed to the seasoning of the portfolio. The other element contributing to the increase in charge-offs, the loss experienced on home equity loans that have higher than 90% combined loans package [ph], which is the source of over 50% of our home equity loan charge-offs. While the bulk of our home equity loan portfolio, credit quality continues to be solid, the proportion of the company's portfolio, loan to value is over 90% that's had higher loss experienced to date 2007. While the lower credit performance is confined to certain products, these are not sub prime or Alt-A originated products. They do include a portfolio of higher loan to value lines that were acquired by originating. To give you a feel for the loan to value construct for the home equity loan portfolio, the average combined LTV of the total equity loans portfolio is around 75%. Looking deeper into the portfolio's stratification, nearly 25% of the portfolio is in the first lien position and carry relative low loan to values of slightly over 20% of the portfolio as combined loan to value that’s higher than 90%. The remaining portfolio is centered around the 60% to 90% LTV range. We believe we have priced all risk and higher LTV's with a greater than 90% retail LTV production using 75 basis points to 100 basis points higher end production with LTVs in the 60% to 90% range. Although we feel the risk adjusted returns on the portfolio are appropriate, especially when viewed over the long run, the company has been taking steps to manage risk of higher LTV products. These include restrictions on new hire LTV production, signing underwriting criteria, including reducing maximum loan sizes, tighter debt to income ratios and obtaining mortgage insurance on higher up LTV products. Nearly 90% production has declined over the past two quarters, and that’s more than 90% of the value and is now running at less than 15%. In summary, credit losses in the home equity loan portfolio are attributable to normal portfolio seasoning and higher loss experienced in the greater than 90% higher LTV portfolio. We believe we are priced for this risk… currently the portfolio, the high risk component of the portfolio, the risk adjustments spread in the portfolio reflect this. Company has also been taking steps to mitigate the ongoing risk of the portfolio. Shifting to residential mortgages, net residential mortgages charge-offs increased in the second quarter with the annualized net charge-off ratio increasing from 15 basis points in the first quarter to 23 basis points in the second. This increase was expected given our higher level of losses we experienced in our Alt-A portfolio, as well as further seasoning of other portfolio. We provided some in-depth detail on the Alt-A portfolio, and Alt-A loans in the warehouse in last quarter's earnings call, and we wanted to provide you an update on some of the key data regarding the products. The Alt-A loans held in our loan portfolio decreased in size for the first quarter from $1.8 billion to $1.7 billion. This is less than 1.5% of our total loan portfolio and 5% of our residential mortgage portfolio. We initiated production of Alt-A in 2004, portfolio-ing a small portion of the production and selling most of it. In the second half of 2006, we began to reduce the volume of Alt-A originated product portfolio and ceased originating Alt-A loans for the portfolio in the first quarter of 2007. Portfolio breakdown between the first lien and the second lien position was 61% first lien and 39% in second lien. Weighted average LTV of the first lien portfolio was 76% and the weighted average FICO score is 71%. Second lien position portfolio has a weighted average combined loan to value of 97% and the weighted average FICO score is 685, slightly less than the first lien average score. We have utilized insurance extensively on the combined LTVs of over 80% and in fact 92% of the second lien Alt-A portfolio is insured. Credit losses on the Alt-A portfolio product did account for over 50% for the residential mortgage charge offs in the second quarter, only at this stage they will stay at this level through year-end. The Alt-A portfolio loans also accounted for nearly 60% of the non-performing residential mortgage loans. We think the balance of non-performing loans will peak in the second half of this year and gradually decline. Non-performing assets which include non-performing loans in other real estate will increase as well and stay at the higher level for the remainder of the year as we work through the loss of mitigation in the February [ph] process. Just into the Alt-A warehouse position, Alt-A loans in the warehouse declined from $883 million as of March 31st to $509 million as of June 30th, a $374 million or a 42% decrease. 97% of the Alt-A loans of the warehouse are first lien loans, credit characteristics of the warehouse are very similar to our first lien portfolio initiatives and reflect the most stringent underwriting guidelines we have been operating under for some time now. The loans in the warehouse have been mark-to-market. The company’s Alt-A production in the second quarter declined only 2% of total production, or $370 million of which all this first lien product is being sold into the secondary market. We are comfortable producing this level of Alt-A loans due to the significantly tighter guidelines we are operating under. For example, we are no longer originating second lien product, loan to values are lower, credit scores are higher. We have tightened the documentation standards, which have resulted in increased levels of full doc loans and minimized the amount of stated incomes, stated asset production. In other words, what is being produced today is at the higher end of the Alt-A structure. Similar to the first quarter, we continue to experience a degree of losses from price adjustments and repurchases and marking the market and selling on top of warehouse. The impact to EPS from these types of losses was $0.05, the same impact they had in the first quarter. Given the fact that the warehouse was mark-to-market, Alt-A production volumes has delivered a higher quality and the early payment default experience on the loans in the warehouse has markedly improved, we expect a negative impact from mark-to-market related losses on loans to the warehouse to lessen in the second half of this year. We continue to closely manage the Alt-A exposure until the situation continues to be manageable given the controls and guidelines that are in place. In summary, our view is that credit will continue to normalize. In certain small areas of the portfolio, losses will continue to ride higher levels in near-term, mainly higher loan to value equity loans in an Alt-A products portfolio. As a result we think the net charge-offs trends for the year will be higher than outlook provided previously. And we expect the net charge-offs rate for the year could be in the 25 basis points to 30 basis points range. This concludes the formal comments of our presentation. We will now start the Q&A. As in previous quarters, each questioner will be allowed one primary question and one follow-up question. If you wish to ask additional questions you can re-enter the questioner queue. Operator, we are ready to take questions.

Thank you, we will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Jennifer Thompson. And please state your company name. Jennifer Thompson - Oppenheimer & Company: Good morning, Oppenheimer. I'm sorry if I missed this, but there were a lot of numbers being thrown around but could you give us the insurance levels you have right now on the 90% LTV portion of your home equity portfolio?

Hi Jen, this Greg Ketron. That wasn’t a number that we talked about. We talked about the insured levels we have in the second lien positions of Alt-A but I can tell you we have employed insurance on the loan to values of over 90% of the home equity loan portfolio. That’s the sort of path that we have been going down for a number of months now, and have been insuring portions of that portfolio. But it’s not something that we discussed this morning, that was more targeted on the Alt-A products. Jennifer Thompson - Oppenheimer & Company: Can you give us a number or even a ballpark, more than half, less than half?

It would be less than half. Now, I think what's important to note here is that the FICO scores in greater that 90% part of the portfolio, broadly are pretty strong. So, that is one element that the loan to value situation, it certainly has to be monitored. We're doing that very closely and that’s why we've decided to enter into insurance. To give you an example, in the second quarter, we have insured almost $900 million of 90% of the greater loan to values in the home equity loan portfolio.

Okay. Aside from the high LTV trends, are there any other trends that you are noticing either in home equity or residential, real estate whether that be geographic or other?

Yes, we find the deterioration that we have seen in this product to be non-geographic specific but really product specific. So, it really is the high loan to value product. And certain acquired portfolios through our merger and acquisition activity in pervious years. But the core portfolio of our core lending activity other than the Alt-A and the 90% plus portion of the home equity portfolio is still performing… we think in a pretty good way and better than industry numbers. Jennifer Thompson - Oppenheimer & Company: Okay. And just one last question. The reserve ratio has been pretty stable, can you give you give us your current thinking on… you saw the greater than expected deterioration in the net charge-off ratio this quarter. Just current thinking on the reserve levels?

Again, this is Tom Freeman. We believe our reserve levels… at current levels as we go through and take a look at forward loss content are more than adequately covered by our current reserve numbers. The two areas where we have been having some charge-off issues, we believe that the Alt-A product is reaching… it will be reaching it peak in terms of the amount of assets going into our non-performing portfolio within the third quarter. And we believe that we will see some emergence out of that relatively small portfolio of 90% plus second mortgage loans. And that’s more than adequately reserved for in our current provisions.

Jen, this is Mark. Just as an example at the annualized quarter, we still have about three times coverage of that annualized charge-off level. It’s about three and half times if you take a year-to-date number, just to put that 88 basis points in some perspective. Jennifer Thompson - Oppenheimer & Company: Great. Thanks very much, guys.

Thanks Jen.

Thank you. And our next question comes from Christopher Marinac. Your line is open, please state your company name.

Hi, Fig Partners in Atlanta. Guys, I was just curious about the residential losses and in just in terms of… with this loss rate necessarily get higher or do you think this might prove to be a peak level that we saw annualized in the second quarter?

It's Tom Freeman again. We believe in the Alt-A portion of the portfolio, we are about reaching peak levels and believe that we will begin to see those numbers turn down in the third and fourth quarters, and we will have digested most of that in terms of both the loss profile in the third and fourth quarters of this year. I don’t think we have reached quite peak levels yet in some of these smaller home equity positions. We will get some emergence out of that we think in the next two quarters, but don’t believe that in terms of the size of the portfolio, it will be a hugely a significantly number.

Hey, Chris, this is Greg. One way to look at it too in terms of… we talked about the Alt-A product in detail and that 50% of the losses are coming from that Alt-A product, if you kill that off, the net charge-offs and you consider we've got $1.4 billion in our mortgage portfolio that is Alt-A, the residual net charge-off levels are in the 10, 12, 13 basis points range. So, that’s accounting for half of that 23, 24 basis points charge-off level that we are seeing in the second quarter.

Okay, great. That’s helpful. Thank you.

Thank you. Our next question comes from Jefferson Harralson. Your line is open and please state your company name. Jefferson Harralson - Keefe, Bruyette & Woods: Thanks, it’s KBW. I want to ask you about the EPS impact of the accounting change on the mortgage revenue line this quarter. You guys accelerated recognition of fees and the value of the servicing. And you laid out I think to expense impact, but did you also break out the revenue impact and I may missed it. But what was the revenue impact of the accounting change?

Jefferson, this Greg. We didn’t give a specific number. What's different about this quarter versus what we saw with the fair value adoption in the last quarter… and if you remember in our presentation, we exhaustively laid out the EPS impact the fair value impact had because lot of those were non-recurring in nature. In this case, this is a change in the way that we're accounting for the warehouse. And the reason we didn’t point it out necessarily in terms of dollar amount, because there is an ongoing situation here. It's not just going to be a second quarter pick up, it’s not going to be there in future period necessarily. Jefferson Harralson - Keefe, Bruyette & Woods: Okay. And of the $0.02 that the mortgage profits the last quarter, to $0.12, so, maybe it's asking the same question different way, but of that $0.02 to $0.12 increase, can you break out the things that you can break out on gains on loan sold. Or the different areas of profit in the business that you can break out?

Jefferson, this is Mark. Would you mind rephrasing your question? I didn’t quite understand it. Jefferson Harralson - Keefe, Bruyette & Woods: Last quarter you guys had $0.02 of profit in the mortgage business on a business line basis. This quarter you had $0.12 and I was hoping you guys could maybe discuss that $0.10 increase and where the $0.10 came from.

Jefferson, a big piece of that $0.02 last quarter is we had approximately pretax a negative $44 million hit when we put the interest rate block in that amounts [ph] at fair value, that was about $38 million or so. Than we had another hit associated with loan that were designated to held for sale. You know that alone reversed off in the second quarter.

We also noted in the comments that we had a significant increase in our production, income related to the record mortgage production of $18 billion we had in the quarter which is up 20%. We also had some positive benefit related to the $3 billion in the portfolio loans that were held for sale and ultimately sold. That’s $3 billion of the $4.1 billion that we moved to fair value that we noted for you last quarter, as well as the acceleration of income that’s associated with the fair value election on the mortgage warehouse. And to Greg's point, when you… there are lots of puts and takes that related to market value adjustments Greg noted, for example, the market value adjustments as well as the other costs associated with Alt-A production and mark-to-market during the course of the quarter. There was a pick up that was related to the mortgage business as it relates to fair value election but it’s also dependent upon future production levels as to whether or not that level of income continues to grow and/or moderate slightly. So, we feel like the overall production levels are indicative of the company’s future performance, and we continue to gain a market share and feel strongly that our mortgage business is well positioned as we move forward. Jefferson Harralson - Keefe, Bruyette & Woods: All right. Thank you.

One other element, Jefferson I would point out is the MSR gain that we had at the second quarter. That was the other piece that drove servicing income to a higher level. Jefferson Harralson - Keefe, Bruyette & Woods: All right. Thanks a lot. I appreciate it.

Just to clarify in that point that the MSR gain which was about $12 million during the course of the quarter relative to prior year, that number was $17 million. So, it was actually down $5 million on a year-over-year basis. And we noted that it was the first gain that we have taken in the asset this year given the Verizon rates which are $66 million in total last year and it's something that we are going to continue to evaluate as we move forward given the fact that that servicing portfolio has increased in size so significantly and the embedded market value gain that we have in the out of footprint MSRs, specifically. Jefferson Harralson - Keefe, Bruyette & Woods: Thanks a lot, guys.

Thank you. Our next question comes from Matthew O'Connor. Your line open and please state your company name.

UBS, thank you. There is obviously been a lot of changes on the way boosting efficiency, better managing your expense space and I think just a general inclusive urgency on all fronts. But, obviously we are in the transition period as all these initiatives are underway. Core earnings have been relatively flat. When we do see a gap up in earnings, in these initiatives and how meaningful can it be?

Matt, as you were mentioning, we've got a number of core initiatives that are already showing progress. We're going to further accelerate those initiatives including our organizational review efforts which we indicated in our release that we would announce in greater detail at the end of August. One of the keys clearly is for the credit environment to moderate some. It’s grown significantly; we had a $50 million increase in provision on a quarter-over-quarter basis. We are pleased that the Company is able to through that. Relatively speaking, we also need to get additional core customer deposit growth, to fuel from a funding standpoint, a further increase in our margins to complement the balance sheet management strategies that we have implemented. So, I would say if you wanted to focus on three things that are keys, one would be the further implementation of our expense and E-Squared initiatives. Second would be seeing the rapid rise in the charge-off level and mirror it some. And then third, getting some good base, low cost deposit growth. And we have a number of key initiatives that we talked about in prior quarters. I can tell you those initiatives are accelerating within the Company including the fall promotions that we referred to earlier that will be beginning year shortly and hopefully we will be positive impacts in the third and fourth quarters. But those would be the three areas, I would point you to.

Matt, this is Jim. I know you would understand this but for the sake if clarity the… even though we have insulated the revenue producing side from our organizational design efforts of others, there is obviously some effect on focus at certain levels of the organization. And we have begun aggressively on the assumption that, and the belief that and I think proof of this point that the E squared initiatives will go quite well, we will achieve what we have set out to achieve, if not better. We have turned our focus to more aggressive operations of the market on the revenue generation side. So, I think that Mark has answered your question exactly right, but I thought might give you a tone that says E squared is going well. It's now… I wouldn’t say it’s on automatic but it's certainly going well. And we are refocusing our attention totally on the revenue generation side. New client generation is still positive, average balances in deposit accounts are still smaller than they used to be but we think we've got a very fine chance and opportunity inside the market to pursue more aggressive deposit generation. Don’t know how that will go. There is a war for deposits out there. We will have to see how that goes. But the revenue side of the bank is in the nurturing mode and refocused. For example, that’s specifically why we did the geographic part of organizational design, first and it is now essentially over. Just thought you might be interested in just a little color on something.

No, that’s helpful. I mean I definitely agree that there has been signs of progress in the initiatives. And I guess we are all trying to get our arms around how much of the cost savings might be given away on sort of like credit deterioration and sort of like revenue give up. And what will the bottom-line impact? And as you look all these initiatives underway, how will you evaluate whether or not this is successful in combination, and I assume there is sort of bottom-line target we are trying to get to.

Well, I think we still say that our longer… from the Investor Day June of a year ago, we still held with our longer-term objectives. The one difference will be a change in the credit thing but for this year in terms of the outlook. But other than that we are still holding our ground, we believe that in fact when some of these what I would call maybe cyclical or abnormal matters change that we will achieve those and we have every reason to believe we shall.

Okay. Thank you.

Thank you. Your next question comes from John Pandtle. Your line is open and please state your company name.

Good morning. Raymond James. I had a couple of questions. I was wondering if you could share some color on the pretension levels at the branch and on the commercial lending side of the bank. And then separately, I think a lot of people would agree that the stock appears to have a fairly meaningful acquisition premium built in which in some way gives you a currency advantage. And I'm wondering if you can talk about strategically how you are looking at potential acquisition opportunities, as you move forward.

Well, let's see there were three questions in there. We will try to take them maybe out of order but we will get… this is Gay Abbott.

Good morning. On the commercial side of the bank, we are seeing a slight uptick in turnover from the commercial banker side but nowhere near turnover ratios that we might have seen two to three years ago.

When you mean retention, you're talking about human beings or clients?

Well, I was really talking about the vendors, the employees.

Good, so Gay has answered the right question, good.

Well, so we are well within industry standards, we track that every month, that’s something very important to us. So, we feel pretty good about where we are in the commercial side.

On the retail side, John. This is Greg. The retention levels we measure it closely and we do all the mystery shopping and do all the stuff [ph] that we do throughout our retail network. The retention levels have remained good, I mean, we have compared ourselves against peers, I mean, they continue to run higher there certainly are areas that we always identify that we would like to improve them across the company, it's not… doesn’t run… the higher level you expect company-wide, but I would say on a average, our retention levels have continued to track very well with peers.

Now with regard to the M&A question, we have stated that we will continue to evaluate opportunities that are presented to us as you would expect us to. We have talked for many years about the fact that we enjoy an outstanding footprint and we don’t want to through acquisition deteriorate that to any significant degree. We have also told you that there are certain markets that are higher growth markets in the southeast, where we could enhance our branch network and particularly in those markets if there were opportunities that became available, we would certainly be remiss if we didn’t evaluate them. The stock price goes up and down, and so we are looking at the long term strategy of the bank and the fundamentals from an evaluation standpoint. But I do want to make sure you are clear, we are going to continue to evaluate opportunities that we find attractive that will help the long-term franchise value as well as the growth of our earnings over the next foreseeable future.

Okay. And, but Mark with the currency being less than it’s been in years, do you have a greater sense of urgency to take advantage of that?

Well let me… let me… this is Jim. Let me take that one. I think our strategy about our footprint as well other as other places, types of transactions we might consider doing has not really changed with the effect on currency. Obviously, it would make it easier in some cases. Prices are still quite elevated in our judgment. So I think you will see us do the same sensible sort of analysis of these transactions or potential transactions we have done in the past. And to reiterate to what Mark said, there are some places where we are thinner than I would like us to be and we would consider doing something, not of a large nature. And while it is nice thing and we are happy with what the stock has been doing, it is up and down and we tend not to change our strategic view of things based on current prices.

Okay, very good thank you.

I think we have time for one more question.

Thank you. Our next question, our final question comes from Kevin Fitzsimmons. Your line is open, and please state your company name.

Sandler O'Neill. Good morning, everyone.

Hi, good morning Kevin.

I apologize, I know you did go over this before, but I just didn't get the number down. if you could go over the share buybacks, what you did this quarter, what you are looking out at in terms of. You mentioned the accelerated repurchase plan in August. So what… what kind of you are looking out for over the back half of the year? Thank you.

Sure. In connection with the balance sheet management activities what I mentioned was that our Tier 1 capital level was inching up on about 8% and we had already announced that we intended a $750 million to a $1 billion or so share repurchase in the second half of the year. To execute that we conducted about $50 million in repurchases during the second quarter prior to entering into an accelerated share repurchase in early June. Those repurchases, as you know… well the ultimate number of shares would be predicated on the share price that occurs during the course of that share repurchase period which is June through August. And as result we've repurchased and removed about 8 million shares from the share count in early June and up to 1.7 million shares will be acquired additionally during now to that end of that program. The combination of those two transactions or series of transactions is about $850 million in shares that were repurchased during the course of the second quarter. And we will continue to evaluate our capital position through the remainder of the year and dependant upon additional balance sheet strategies and/or the ultimate resolution of our stock holdings, we may be in a position to add to that share repurchase level. We'd indicated before that our long term goal of return of share… of earnings through the combination of dividends and repurchases was in that 70% to 80% range. We were north of 90% last year and we're likely to be in that same kind of range this year. And so we'll continue to evaluate as we move forward but that's what we've conducted today.

Okay. Thanks very much.

Thank you.

Thanks for joining us on the call today. Please call me if should you have any additional questions.

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