Welcome to the SunTrust second quarter earnings conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today's meeting over to Kris Dickson, Director of Investor Relations. Thank you. You may begin.

Thanks, Carolene, and good morning, everyone. Welcome to SunTrust's second quarter earnings conference call. Thanks for joining us. In addition to the press release, we've also provided a presentation that covers the topics we plan to address during our call today. The press release, presentation and detailed financial schedules are available on our website, www.suntrust.com. This information can be accessed by going to the Investor Relations section of the website. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; Aleem Gillani, our Chief Financial Officer; and Tom Freeman, our Chief Risk 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 in 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 at www.suntrust.com. Finally, SunTrust is not responsible for, and does not edit nor guarantee, the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website. And with that, I'll now turn things over to Bill.

Okay. Thanks, Kris. I'm going to start this morning's call with a quick overview of the quarter, and I'm going to pass it on to Aleem to provide details on the results. I'm then going to come back and wrap up the call with some highlights from a business segment perspective, where you'll see we generated continued positive momentum in our Consumer and Wholesale businesses, but faced some headwinds in mortgage. Earnings per share for the quarter were $0.68 and net income grew to $365 million. Ongoing credit improvement, coupled with continued expense discipline, drove the earnings growth up 36% over last year. On a sequential quarter basis, both net interest and noninterest income were down modestly. The net interest income decline was from the expected decrease in our commercial loan swap income. The decline in noninterest income was driven by lower mortgage-related income. However, this was almost entirely offset by broad-based growth in other noninterest income categories, most notably, investment banking income and wealth management-related fees. Our intensive and ongoing efforts to drive efficiency improvements produced a 10% reduction in noninterest expense from last year. Core operating expenses continued to be well controlled this quarter, though the more volatile cyclical costs increased. This increase was something we expected coming off a low first quarter levels, though its magnitude was higher than I care to see. Overall, we saw a 2% sequential quarter increase in total expenses and an increase in our efficiency ratio. We still anticipate that these cyclical expenses will continue to trend down, and our focus on achieving our efficiency ratio objectives remains high. Average performing loans were up about $600 million during the quarter and the ongoing portfolio diversification efforts continued, with targeted growth in both C&I and commercial real estate loans. The credit quality story continues to be a good one, with nonperforming loans and net charge-offs hitting their lowest levels in over 5 years. Nonperforming loans declined by over 50% from last year and this quarter's net charge-off ratio improved to 59 basis points. Lastly, our capital position continue to improve, with our Tier 1 common ratio reaching new all-time high at an estimated 10.15%. Consistent with our CCAR announcement, we increased our quarterly common stock dividend from $0.05 to $0.10 per share during the quarter, and we also commenced our share repurchase program, buying back $50 million of our common stock during the quarter. Overall, for the quarter, we demonstrated progress in our strategic initiatives to grow and diversify our business, and our financial results continue to trend favorably. While we see solid pipelines and much improved loan production, our loan balance growth isn't quite yet what we'd like, and near-term mortgage revenue is likely to slow. However, the improving operating environment and southeastern economy, coupled with our enhanced focus and execution, I believe bode well for SunTrust future opportunities. And with that, let me turn it over to Aleem to walk you through the quarter in more detail.

Thanks, Bill. Good morning, everybody. Thank you for joining us this morning. I'll begin my comments today with summary observations on this quarter's key earnings drivers and then, we'll delve deeper on subsequent slides. Our profitability growth continued this quarter with earnings per share of $0.68, which was $0.05 more than last quarter and $0.18 higher than last year. The sequential quarter increase was due to the ongoing improvement in credit quality, which resulted in a lower provision for loan losses and this more than offset the modest revenue decline and expense increase. Relative to last year, the 36% increase in earnings per share was due to a lower provision for credit losses and a 10% decline in noninterest expense. The latter of which was a result of our efficiency improvements and the abatement of cyclically high costs. Lower net interest income, due to the impact of the interest rate environment as well as declines in mortgage and trading revenue, were partial offsets. We'll review all of the underlying trend in more detail starting on Slide 5. Net interest income declined sequentially by $9 million. This was driven entirely by the $14 million reduction in commercial loan swap income, partially offset by an additional business day in the current quarter and modestly higher average earning assets. Consistent with our prior guidance, the net interest margin declined 8 basis points. The NIM compression resulted from the commercial loan swap income decline, as well as the ongoing compression in earning asset yields due to the low-rate environment. A modest reduction in deposit rates paid was a partial offset. Relative to the prior year, net interest income was $64 million lower and the net interest margin declined 14 basis points. The primary drivers of both were lower asset yields, a reduction in commercial…

Okay. Thanks, Aleem. And I'll move to Slide 13. Taking a look at our business from a segment basis reveals several favorable operating trends. In our Consumer and Private Wealth Management businesses, net income was up 21% over last year, result of continued credit quality improvement and a 9% reduction in noninterest expenses due to changes in our staffing model and our branch network. We've steadily improved the efficiency ratio in this business, driving it down over 200 basis points from the last year to 65.4%. We obviously continue -- we need to continue to focus here, but we have good momentum behind us. The loan balances were down from last year due to the fourth quarter student loan sales. Consumers willingness to borrow seems to be improving. We continue to see strong production across our consumer lending products with production volume up 16%. Overall, deposits were down 1%, though DDA continued to increase and consumer time deposits were down 17%, marking another quarter of favorable mix trends. Now let's take a closer look at our Wholesale business this quarter. Our Wholesale business had its second highest net income quarter ever and grew 37% over last year. Ongoing improvement in credit quality drove a substantial decrease in the provision for credit losses, as well as a reduction in OREO expenses. A 10% expense decline from last year, as well as higher net interest income, helped drive down the efficiency ratio over 650 basis points to 52%. The segment had solid loan growth as we continued to grow C&I. Growth was driven by our not-for-profit and government industry vertical and dealer businesses, along with our large corporate lending areas, most notably, asset securitization, our energy vertical and asset-based lending. As you're aware, Wholesale is an important business for us. We've had…

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

[Operator Instructions] Our first question or comment comes from Paul Miller from FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Real quick housekeeping question. On your income statement, where it says mortgage banking, $133 million, is that net of the provision?

The repurchase provision for the quarter, Paul? Paul J. Miller - FBR Capital Markets & Co., Research Division: Yes.

Yes, it is. Yes. Paul J. Miller - FBR Capital Markets & Co., Research Division: So that $133 million is net, so if that provision wasn't there, it would be even closer to $200 million?

Now the provision for the quarter -- the repurchase provision for the quarter was $15 million. Paul J. Miller - FBR Capital Markets & Co., Research Division: Oh, $15 million. I'm sorry, yes. So it would be closer to $133 million plus $15 million?

Exactly. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. And then, can you add some more color on your purchase volumes? Like, are you guys increasing that dynamic by going after that product or is it just coming in the door? Because I know we've seen purchase volume up pretty strong across the space.

Yes, we've always been a good purchase mortgage business. And you certainly saw that mix, substantially, in the latter part of the quarter. I mean, our closed purchase volume in June was 40% of our business. Of course, it was down overall, but it was 40% of our business. Our absent purchase are up fairly substantially. And if you look at us and think about some of the markets that we operate in and some of the recovery in those markets, we're pretty bullish on what we see on the purchase side. Now that being said, and I said in my comments, that's not enough to offset refi. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. And then, one last question is, what percentage of your stuff is -- are HARP loans? Do you guys know that?

In the quarter, about 20% of our refi was HARP. What you'll see is, applications of HARP are down, down fairly substantially, which wouldn't be a surprise.

Our next question or comment is from Erika Penala from Bank of America Merrill Lynch.

Aleem, I just wanted to ask you a question about the comments you made on your MSR hedging. I guess, and I apologize if this seems like a silly question but I always thought that when long rates went up, then we could expect more hedge gains as you revalue your portfolio higher. But you mentioned on the call or during your prepared remarks that it would continue to go down, but decay less. Am I misunderstanding that?

Yes. Erika, yes, a little bit. The decay is a reduction to income. If you take a look at the deck, in the back of the new slide that we put in to try and help you. If you take a look at Page 27 in the appendix, and you'll see a line there called decay. And that's a reduction to servicing income. And as refis decline, that decay ought to reduce. That's what -- that's the point I was trying to make. And so that ought to help servicing income over time.

Okay. Got it. And my follow-up question is on your gain on sale margin. Could you help us think about, as we forecast out, how we should think about your purchase gain on sale, your non-HARP refi gain on sale and your HARP gain on sale?

Well, we -- the gain on sale, in general across those, is relatively similar in terms of margins. We don't have a higher -- we don't charge a higher rate for HARP, for example, versus other loans in general. Where we get a slightly higher gain on HARP is because we put most HARP loans in through our least expensive channel, consumer direct. And so the lower expense for HARP loans leads to a, sort of, slightly higher gain on those loans. I don't know if that gets to the point of your question. But in general, if you look at our margins across the board, they're not that much higher in terms of rates charged for HARP relative to other loans.

So just to make sure I understand, and I'll get back in the queue, the mix shift shouldn't have an impact on your gain on sale margin going forward?

It may have a little bit as, if HARP declines and therefore, we have less HARP to put through our least expensive channel, that might have a slight negative impact on our overall gain on sale.

Well, Erika, let me also come back to a point I think you asked on your first question on MSR, on the hedging activity. We hedge our MSR out every day, not just every quarter, but every day. And so the volatility in MSR is a volatility that we're generally not willing to take on a day-to-day and quarter-to-quarter basis because we treat those at fair value. So if you think about MSR a little bit like a trading asset, that's volatility we're not willing to absorb. So we hedge that out. If you, again, take a look at Page 27, what you'll see is that the write-up in MSR this quarter was almost perfectly offset by the hedge. The hedge worked really well, and if that's getting to your point about you were expecting to see a big gain from MSR, that did, in fact, occur. The asset did go up, but the hedge worked very well to offset that.

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

Just questions on expenses. There's a bunch of moving parts, obviously, and I just wanted to understand a couple of things. First of all, can you give us an update on -- you had previously said something about environmental moving back towards $325 plus or minus $50 million. And obviously, we're back up this quarter, as expected, to about a 500 run rate. So can you just give us an understanding of, do you expect to trend back down towards $325 million plus or minus $50 million? Or from what you see, could we get distinctly better than that at some point?

Well, I think, this quarter, we did have a tick back up for a couple of reasons, Ken. Some of that was a little bit than we expected. And I think last quarter, we guided to a slight increase back up, just because of the big step down we had in Q1. And the Q1 number would have taken us to sort of well below that $325 million if you had annualized that. But if you look at, if you remove the 1 item, the mortgage-related legal accrual item, which goes into that -- and you can see some detail on this on Page 29 of our appendix. If you remove that 1 item, then, if you annualize the first half of the year, we're actually in line with that normalized level of $325 million plus or minus.

Well, exactly. And so if you're already there, I would presume that there's still a very good amount to go from here or is there any reason why that wouldn't continue to improve meaningfully?

Well, I would hope it would decline some. But a portion of that, if you look, again, at Page 29, a portion of that is credit services. And that portion is actually what we pay every quarter anyway just the ongoing cost of putting new loans on the books. So that portion is not going to change very much. OREO, if you take a look at OREO costs, you've seen in the first half of the year, our OREO costs are a total of $1 million and that's not really going to be sustainable in the long term. You would expect that to come up a little bit. So while the other 2 components of our cyclical costs ought to come down some, there will be some upward pressure from OREO. In general, I would expect this to trend down a little bit, but I think that $325 million plus or minus is actually our attempt to give you some pretty good guidance.

Yes. And remember, sort of pre-crisis, this number was sort of in the $200 million or $250 million kind of range, and it got up to about the $700 million range. So the $325 million was an attempt to try to figure out, the $325 million plus or minus as you defined it, was try to sort of figure out what's the new normal. I don't think the new normal will be pre-crisis. But clearly, we're trending down and I think the way Aleem described it, sort of, more annualized in the first half, seems to be that we're tracking towards what we talked about.

Yes. Okay. And then, my second question is just about the mortgage business. And you guys are doing a really good job on the comp and benefits side, adjusting. I'm just wondering, how much have you already adjusted with your mortgage capacity versus how much you could -- you still have to adjust here relative to the ongoing changes in the origination environment. So again, kind of, what's already been adjusted to versus how much can you adjust further?

Let me take a crack at that. As you mentioned, there is about 20% of the variable cost which are in the categories you primarily talked about, which are compensation and then, just sort of when you think about sort of normal kind of cost of appraisals, and those things that are just highly variable to activity. Now they do lag a little bit because of the lock and close. We booked a gain at -- book the gain at lock and we pay the comp at close, so it's got a little bit of lag. But the 20% sort of happens. I mean, that's part of the system. We made a conscious decision as we were building up -- and seeing what we had in the refi side, as we built up this time, we took about 25% to 30% of our cost and essentially, let's call it, outsourced it for lack of a better word, and we created more variability. So that cost, in the past, would have been more fixed cost on our books. It's now more of a variable cost. So several weeks ago, literally the day, I think when we started to see what was going on with rates, we started putting contingency plans in place to not only get those variable costs down, some of the fixed costs we converted to variable and then, putting plans in place to figure out what the actual fixed cost as well, have to -- have to come down. And those plans are already in place. I mean, we've already punched the button. I guess, if I were trying to summarize sort of how to think about it, if you think about sort of the new mortgage takes all the legacy out, at the higher gain on sale, we were originating the mortgage at about a 50% efficiency ratio, to sort of think about that at a high level. Now with sort of the changes in trying to -- with the lag and everything else, our goal will be, and I'm fairly confident we can see a path to this, we'll continue to originate mortgages in a way that is accretive to our current efficiency ratio. Maybe, does that help?

Yes. I guess, if you'd wrap it all together just on the expense comments, can expenses continue to come down from here, just in absolute terms?

Total expenses or mortgage related?

Total.

Yes, total. So we were operating sort of at a total expense level, sort of, at $1.5 billion kind of handle to it. It now has a $1.3 billion handle to it, and that feels a lot better. So I have no intention of us going backwards from that standpoint. And we've committed to an efficiency ratio of 65%. And long term, we've committed to efficiency ratio of 60%. So some combination of revenue and expense, relativity is going to get us to that 60% efficiency ratio. So if we stay in this low-revenue environment, we're going to lower our expenses. Hopefully, with the initiatives that we've seen, changes in the rates, increase in NII, we'll be able to have some revenue component to add as well.

Ken, when you think about what our expenses were last year or the year before, we were running at $6.2 billion in annualized expenses. If you look at where we've come in this year, we're running about $5.6 billion in annualized expenses. So we've taken $600 million of expenses out of the system so far, but we haven't stopped. There are going to be other opportunities. We're looking at other things. The focus of this management team remains intense.

And also, that's sort of a natural. As expenses are coming down, they get annualized and actualized. So as they come down, they tend to have a natural momentum.

Our next question or comment comes from Ryan Nash from Goldman Sachs.

Just, first, maybe a question on the margin. Given the fact that the swap roll-off is no longer a headwind for the next couple of quarters and Aleem, you mentioned reinvestment yields are improving, I understand that we're going to be down a couple of basis points next quarter and then, we should stabilize for 4Q. Can you just help us understand what the path may be beyond 4Q? Has the rate environment improved enough such that reinvesting yields are greater and you can -- and we can now see some more stability to the margin? And I have a follow-up.

Well, that's sort of a tough question, Ryan. There's a little bit of a crystal ball in here. I think the rate move that we saw was certainly nice, that the industry certainly needed it. So thank you, Mr. Bernanke. However, what the industry really needs is move up in short-term rates to take us back to the profitability levels that we enjoyed before the crisis. And while this is great and this will certainly help mitigate the overall decline in margin for the industry and for SunTrust, it's -- all this is, is a steep -- a somewhat steepening of the curve. We're certainly not back to normalized rate levels. And when you think about where the industry's net exposure is along the curve, it's generally much shorter as an industry than 10 years. So this is going to help somewhat. It's not going to be what we need to take us back to much higher net interest margin levels.

Okay. And then, Aleem, if I could just add 1 follow-up. Just related to the swaps. I think the release mentioned that you did add some swaps in the quarter. Can you just remind us what the duration of the swap book is? And I think, also, according to the 10-Q, it says when rates rise, I think, 200 basis points, we should see NII rise 5.3%. Does that number take into account the impact of swaps rolling off? And if not, what would your asset sensitivity look like without that?

Well, our asset sensitivity -- let me start with our asset sensitivity, at the end of the second quarter, is currently 1.3%, and that's based on 100-basis-point parallel shift. So that's an instantaneous 100-basis-point parallel shift and how much our NII will go up as a result. The swap book duration at the end of the second quarter is 2.5 years. And the way the balance sheet is structured, we become more asset-sensitive every month, naturally, unless we do anything. So unless we take action, we're structured to become more asset-sensitive every month. As the swaps roll off over the course of the next 2.5 years, and some of them obviously are before that, you'll see us becoming more asset-sensitive over time.

Our next question or comment is from Gerard Cassidy from RBC.

I may have missed it, but can you give us some color on your Tier 1 common ratio under Basel III increased very nicely in the quarter? And we saw that the risk weighted asset number fell, which was a driving factor. What drove the risk-weighted assets down?

Under the Basel III calculations, Gerard?

That's correct.

The new rules have changed pretty substantially from the previous proposal. And the effect of the new rules is for some that there were -- in the previous proposal, there were multiple tiers of risk weightings for mortgages, including 1 tier that was up to 200%. The new rules basically put all mortgages into 2 tiers, 50% and 100%. And as a result, doing sort of normal mortgages for normal clients doesn't require us to put up additional capital for regular mortgages, as well as, for home equity. And that's a big benefit for our portfolio. We also received additional benefits for our CRE exposure. I think what you ought to see is, across of the industry, you ought to see regional banks do better as a result of the new rule than money center banks. You ought to see regional banks do better than investment banks. And you want to see banks that have mortgage exposures do better than banks that don't have mortgage exposures.

Relatively.

Relatively.

Right. Great. And the second question is, coming back to the environmental cost, where you guys have indicated that around that $325 million is the new norm, down from $700 million, but up from, I think, you said 2.25 or 2.50. What's preventing the environmental cost from -- when we get to a normalized state and you can pick whenever that is, it may be a couple of years from now, but what prevents the environmental cost from actually getting back to the way they were pre-crisis?

Well, I think one of the things that I'm concerned about in general is, as a country, as an industry, have we trained consumers that it's okay to not repay debt? And is there going to be a higher incidence of default over time in the future than there has been in the past? That is one of the things I'm concerned about, and that's one of the things that's holding me back from saying that we're going to get back to the world that we once had.

And I think, if you also just -- some of this, well, may also be our natural conservatism. So there may be some factor in there, but if you think about the cost of things. So think about the cost of collection and credit services under a different regulatory environment. And the requirements to meet different and more stringent standards, there's just some additional cost for that. Now how much that is, I don't think we also know. That hasn't leveled out yet. But the only the reason we say it's more than previous is there just really is embedded increased different cost of compliance that didn't exist before.

Cost of service is likely to be higher, as Bill says...

It's going to be.

And there are likely to be higher set of repurchase demands from the GSE in the future than there have been in the past, and a longer duration. And now it also takes longer to resolve default and other issues than it used to. So Gerard, I think, directionally, you're right. But I'm not sure that we'll get back to that type of a number.

Our next question or comment is from Brian Foran from Autonomous.

I guess, given the payout ratio this year, I know it's early to talk about next year's CCAR, but just remind us, you will be accreting capital lapse and a big change in the balance sheet growth outlook. And maybe kind of looking at a 10%-ish Basel III ratio next year. How are you thinking about the priorities beyond organic growth, which I'm sure is the first priority both now and in the future?

You're right. Organic growth is absolutely #1.

You're also right, it's early to talk about CCAR.

But if what you're asking, Brian, is a CCAR question...

I guess, maybe I shouldn't have mentioned CCAR, just more the capital waterfall now that 6 months ago, we wouldn't have necessarily had you in the excess capital bucket. Now we've got you in a pretty big excess capital bucket, at least, on our numbers. And just remind us of what your waterfall is beyond that organic growth between dividends, buybacks, acquisitions, all that kind of good stuff?

Acquisitions aren't really making the list, that's pretty low down. Organic growth is #1, meeting our clients' needs is always #1 for SunTrust. Beyond that, to the extent that we'll be able to grow dividend and buyback and return capital to our shareholders, obviously, that's going to be high on our list. And by the way, we're delighted to be able to start to do that this quarter for the first time in 6 or 7 years. So we're pretty happy about being on this side of the line. Never say never for acquisitions, I guess, but we've got so much opportunity, Brian, to run our company better and become more efficient, to focus on our clients and just do more business. That's really what we're focused on.

And then, just maybe 1 follow-up on the swaps, not to overkill the issue. But what's the reasoning -- so swaps versus MBS or swaps versus securities, I mean, the reasoning to add swaps, is it just more efficient from a balance sheet perspective? Or does that do other things for you as well?

One of the things it does is that it's quick. When -- I said earlier that we're opportunistic in the way we did this, and we were able to add $2 billion in swaps right at the end of the quarter very quickly as rates moved up. So these swaps are efficient from a transactional perspective, both going in and going out. So that's helpful. They don't also affect earnings in a one-time way on the outlook. We sell securities and take a gain, that gain shows up immediately and then, requires an adjustment by everybody. Whereas, if we exited swaps, the gain in the swap just accretes in the income over the original life of the swap, and so it doesn't require a lot of sort of extra adjustments. I guess, one other point is that they are a really good hedge in the balance sheet for our commercial loans.

Our next question or comment is from Marty Mosby from Guggenheim.

Aleem, I wanted to walk through the mortgage banking segment income statement. You're showing a $76 million loss in the quarter. And what I was trying to do is think of, as you talked about the production coming down, you've already kind of, like you said, you do have locks so you've already got a lot of the gain on sale margin compression in there. But I think there's 3 other moving pieces that will, potentially, more than bring this to a breakeven. I think you've got the $72 million legal matter in this segment because that would be real estate-related. You've got the $28 million of incremental collection cost, and you also have suppressed servicing profitability as your, like you said, decay goes back to where it was. Even if you have your hedge about 0 or breakeven, your decay should improve by about $20 million. So in my mind, I'm just trying to map the $76 million to, at least, to break even in the short run, and these 3 moving pieces seem to kind of get me there. I just wanted to see what you thought about that.

Marty, I think you got the direction right, but the numbers, perhaps, not exactly right. That legal matter wasn't as high as the $76 million. We referenced the legal matter as being sort of the primary driver for our overall increase in expenses, which were up $34 million. So the legal matter I would think about it in that context rather than the $76 million. The increase in operational expenses, credit expenses, was about 18. And I think you've mentioned a higher number just now. And over time, yes, I think directionally, you're also right on servicing. And servicing income ought to also come back, will also come back over time as we start to get less volatility again, and rates will help and as decays come down. So directionally, I think you're right on every one of those pieces. But the numbers you mentioned seem a little high to me.

Okay. And then, just a follow up on the servicing side. When you look at your net hedge performance, it's been favorable. And you mentioned the volatility being the driver of the negative that you saw going from -- what's been a $30 million to $40 million net positive, down to about breakeven. Are you using forward commitments, and is that mainly why you end up with a little more the volatility matter than if you were using interest rate swaps, which don't typically be -- aren't as related to the volatility in the marketplace. So I just was wondering, if we do see rates leveling back out, could even the net hedge performance improve from where it's at right now?

Marty, I would think about it this way. MSR, as an asset, are inherently negatively convexed. So within MSR, we're naturally short volatility. So the hedging process requires that we buy volatility or offset that short volatility position. And it's cheaper to do that in any quarter when there is less volatility in the market. So and that's been the case as we have seen for the last year or so. This quarter, obviously, there was a lot of rate volatility in the market. And so just the cost of buying back that short volatility position went up. If, as you say, we head back to a more normal rate environment -- and it sort of doesn't really matter if it's going up or down as long as it's not volatile, the hedge ought to start to perform -- the outperformance we've had in the hedge ought to start to come back, yes.

And just out of curiosity, the product you're using to get that convexity is a forward commitment? Is that -- what's the product you're using to hedge here?

We've got some forwards, we've got futures, we've got swaps, we've got securities and we have options.

Would swaps be a smaller part of that? I'm just trying to -- because typically, the swaps don't have the convexity and don't relate to the volatility, is what I'm trying to get at.

You're exactly right. When we use swaps, we're using that for a duration hedge, not really a convexity hedge. And it's more options and forwards that will help us on the convexity side.

And our last question comes from Matt Burnell from Wells Fargo Securities.

Aleem, I just wanted to ask a question from Page 25 of the supplement, and the Corporate and Other page, where you say, where you lay out your interest income, interest rate sensitivity. It looks like it's down by a bit more than half from the first quarter numbers that you put on the same page. And I guess, I'm just curious if you can give a little color as to what's going on there? And how you're thinking about how that might change over the course of the next 3 to 6 months?

Well, Matt, I think that's another crystal ball question. That depends on exactly what rates do, how steep the curve gets and whether short rates move at all. But in general, our asset sensitivity increases by -- and I'm going to round here, but it's about 0.1/10 of 1% per month. So it will naturally go up unless we do something. What we did do in this quarter is we added some of those swaps. So the swaps that we added reduced our asset sensitivity some, but they also added $8 million a quarter to our interest income. And on Page 24 of the deck, when you look at the new swap income forecast, you'll see that that's flattened out pretty considerably now right into the middle of next year. So we added some surety as we took advantage of the higher rates that we saw in the second quarter, and that did make us a little bit less asset-sensitive in the short term. But that asset sensitivity will come back while we've added NII.

Okay. Let me ask a question about the non-mortgage lending business, if I can. Bill, you mentioned your increased level of confidence about commercial lending and potential loan growth in the second half of the year. Could you give us a little more color as to why you're feeling more confident about that? And are there any specific regions or products within C&I that are particularly fertile areas for loan growth?

Yes, and I don't want to get over my skis on confidence, but I want to talk about the things that we do see. And if you sort of look at -- one of the bigger things that we look at, as I look at it, are our commercial pipeline. Our commercial pipeline was about equal to what it was at the end of the first quarter. But that's about 60% ahead of where it was at the end of 2012. So we're built -- so we're building a pipeline that's positive. In terms of the places where we've seen, to date, good activity, in the commercial side, our not-for-profit business has been really good. On the CIB side our energy business, I'm really happy to see things like -- that we've invested in, like asset-based lending, are starting to click in and provide some more activity. And then, related to the consumer side, production is up and we saw -- I don't -- maybe it's an inflection point, but we saw an inflection point on home equity that, that sort of finally stabilized. Remember, we have sort of been in a fully attriting mode on home equity over the last quarter, that sort of has stabilized. And production in home equity is really, really good. So it's mainly production and pipeline kind of things that I see, and those are all offset against continued deleveraging and other activities. And then, the final is CRE. And albeit off a smaller base, it's about $5 billion base. I mean, similar there, we hit an inflection point already. So at the last quarter, we hit an inflection point. We're now starting to be in a growth mode. And production there in the -- I guess, primarily, the institutional side has been good. From a region-by-region perspective, it's pretty evenly distributed, but we are seeing parts of our markets, take Florida, probably, as the largest example of the most recovery in the shortest period of time, which make us more optimistic as we see sort of state unemployment rates, again, particularly in areas that were way down, like Florida, which are now way up, and trending ahead of national numbers.

One of your competitors mentioned continued conservatism in the mid-market and small business sector. Is that consistent with what you're seeing as well?

You mean, from the client perspective, continued conservatism?

Yes.

I think that's accurate. They continue to have a lot of cash, while there's lots of dialogue and conversation. But I think conservatism in that group, as defined, is an accurate statement.

Thanks, everyone, for joining us today, and we appreciate it. If you have any further questions, certainly, feel free to give the IR department a call. Otherwise, have a great weekend.

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