Ladies and gentlemen, thank you for standing by. Welcome to the SunTrust Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions with instructions being given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I’d now like to turn the conference over to your host, Ankur Vyas. Please go ahead, sir.

Thank you, Julia. Good morning, everyone, and welcome to SunTrust Second Quarter 2018 Earnings Conference Call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; and Allison Dukes, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website. With that, let me turn the call over to Bill.

Great. Thanks, Ankur, and good morning, everyone. I'll begin with an overview of the second quarter, which we highlight on Slide 3. Earnings per share for the quarter was $1.49, which represents a 16% increase compared to the prior quarter and a 45% increase compared to the prior year. Overall, we had a strong quarter. This performance is driven by our focus on continuous improvement and consistent investments in growth, in addition to the favorable operating environment. On the revenue front, we saw a pickup in both capital markets revenues and commercial lending activity as was anticipated by the pipelines we had leading into the quarter. These improvements, when combined with a 4 basis point expansion in our net interest margin, resulted in a 4% sequential revenue growth. Bigger picture, this growth is the direct result of the ongoing investments we have made and continue to make in our key areas of differentiation, including SunTrust Robinson Humphrey, the broader wholesale banking segment, and our consumer lending business. In addition to the revenue growth we delivered, our continued discipline on both expenses and returns is driving improvement in our profitability and, ultimately, enhancing the earnings power of the company. Specifically, this quarter, our tangible efficiency ratio was 58.7%, and for the first half of the year, it was 60.4%, down 220 basis points relative to the first half of last year. Given our strong performance this year, I'm confident in our ability to reach our sub-60% target somewhat sooner than we originally anticipated. More importantly, I can certainly see a path for several hundred basis points of additional improvement beyond sub-60% over the medium term. However, improvement in efficiency ratio will not be our only measurement of success. I believe across the company, we have significant opportunities to grow our client…

Thanks, Bill, and good morning, everyone. Moving to Slide 4. As Bill indicated, our net interest margin improved 4 basis points this quarter, primarily as a result of the increase in short-term rates following the March rate hike. We also benefited from positive mix shift within the loan portfolio as consumer direct continues to grow faster than the rest of the book. These benefits were partially offset by higher deposit costs and higher levels of wholesale funding, given the pickup in loan growth. This improvement in the net interest margin, when combined with the 1% growth in average loan, resulted in a 3% sequential increase in net interest income. Looking to the third quarter, we expect the net interest margin to increase by 0 to 2 basis points relative to the second quarter. Largely as a result of the June rate hike and inclusive of our expectations, the deposit cost will continue to increase. More broadly, the pace of NIM expansion going forward is likely to be lower than what we have experienced in the recent past due to rising interest rates and higher loan-to-deposit ratios, both of which will negatively impact funding costs. However, this environment is also likely correlated to solid loan growth, which will support continued growth in net interest income. Moving to Slide 5. Non-interest income increased by $33 million sequentially, driven entirely by strength in capital markets, which was up $47 million relative to the first quarter. This was due to broad-based growth across most investment banking and trading businesses. Some of this increase was offset by lower mortgage servicing income, which declined by $14 million as a result of higher decay expense, most of which was driven by higher prepaid fees in connection with the spring and summer purchase season. Additionally, other non-interest income…

Great. Thanks, Allison. So to conclude, I'll point to Slide 13, which highlights how our performance this quarter aligns with our investment thesis. Overall, this was a well rounded quarter and one where our performance is the direct result of the strategies we've put in place and the investments we've made. Much of our investment strategy has been to focus on growing and supporting our key areas of differentiation, which has proven to be highly effective and is reflected in this quarter's results. So more specifically, the investments we've made in LightStream and third-party partnerships are providing top-notch experiences for our clients and attractive risk-adjusted returns for our shareholders. Within CIB, we've been particularly focused on investing in our M&A and equity platforms to allow us to increasingly become the strategic adviser of choice. The advisory capabilities continue to grow at a faster pace than the traditional debt business, which, obviously, ultimately, improves our ROE. Within commercial banking and the broader wholesale platform, we've invested heavily in developing our industry and corporate finance expertise such that we can deliver increasingly sophisticated solutions to all of our clients. As Allison mentioned, we took another step in the geographic expansion of commercial banking by broadening the scope of our aging services vertical, an area where we already have demonstrated a clear competitive advantage in the marketplace. More broadly, our focus on continuing to improve our technology infrastructure both for clients and teammates remains high. As discussed earlier, we saw good initial adoption of SmartGUIDE and completed the transition of all of our wholesale clients to SunView, our improved treasury management platform. In addition, we recently brought our mobile app in-house, which gives us the ability to add new features at a much faster pace. To further improve our agility, we're increasing our…

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

[Operator Instructions] And our first question comes from the line of John McDonald of Bernstein. Please go ahead.

Hi. Good morning, guys Looked like you saw a nice pickup in loan growth this quarter. Bill, maybe you could give us a little bit of color in terms of what you saw there? Is it changes in production, you seeing better production or -- is also some better paydown? Maybe just a little bit of color there on both the commercial and consumer side? Thanks.

Yes, paydown has actually been fairly consistent. So this was a quarter in which we saw strong production. We talked about that sort of at the end of the first quarter and leading into the second quarter. We've talked, John, about the advent of when will we sort of see some of this benefit from tax stimulus, sort of what's the gestation period, and I think we're starting to see some of that. I mean, what was really encouraging is that it was very broad-based. It was more business investment and M&A, less refinance, so seems more sustainable. Consumer lending, continuing growth in the targeted areas, LightStream and the partnerships, credit card and all of those are accretive to our bottom line. We did see the benefit of some new lending capabilities in CRE that we introduced last year. This was part of our broader strategy and really a lot in conjunction with our Pillar acquisition. We're doing some more permanent financing. We're doing some agency bridge financing, all very conservatively underwritten as you would expect, but allows us to participate more in the full cycle with very, very strong partners. And then we've also seen some construction loan activity in the Southeast, in particular. We've seen a lot of build to suit for regional and national headquarters, which I think is a good evidence of just the strength in our markets. And then some revolver utilization improvement as well. So the answer is, it was -- a lot of places, it was broad-based, and it was accretive to what we saw, I mean, to our existing portfolios and the existing pipelines look good.

Great. And just a quick follow-up on the capital return. There's a nice step-up in the buybacks. Any expected cadence or timing around the buyback? Do you have any preset idea to front-load it or have it more evenly distributed? Any thoughts there?

Sure, John. This is Allison. We have more flexibility with our buybacks this year, but we haven't determined exactly how we're going to space that out yet.

Okay. Thanks, guys.

Thanks, John.

Thank you. And our next question comes from the line of Matt O'Connor of Deutsche Bank.

Good morning.

Hi, Matt.

I was just wondering if you could talk about the ability to continue to take out costs and essentially self-fund. Obviously, your comments on the efficiency ratio in the medium term are very positive, but we are seeing some expense pressure at some of your peers, with some inflationary pressures. Could you just talk about the ability to continue to take out costs and keep the expense growth minimal?

Yes, we tend to focus on the efficiency ratio rather than the expense number. But as I've said in my comments, I mean, I think over the medium term, Matt, I still see several hundred basis points of efficiency improvement. We don't want to get locked down to a quarter-by-quarter definition of what that might be, but we still see opportunities to improve, and they're in virtually every category. I mean, there are organizational issues. We've done a lot of things related to structure, span and layers. We did a voluntary retirement last year. We're down in roughly 4% total FTEs over the last 9 months. Lots of opportunities still in technology and the realization, quite frankly, of investments that we've already made. We've automated a lot of processes in the company. Private wealth has been a really good leader in that area as an example; the new loan and mortgage platforms; cloud migration, which I mentioned; a lot of end-to-end back office opportunities; we consolidated from 10 to 2 sites in mortgage and, again, we'll realize the benefits of that; supplier relationships continue to grind on those opportunities and optimizing and more opportunities to pay for what you use; and then our real estate footprint. Our branches are down 5% roughly year-over-year. Total combined real estate footprint is down 20% since 2011. We've done some major consolidations in some of our major markets, and we still have opportunities there. So all of those things, Matt, are what give me the optimism that we can continue to drive the efficiency ratio down and, as you said, create the additional runway to invest, which we've been doing all along. I mean, this structure of the declining efficiency ratio has been combined with significant investments in our business.

Okay, that’s helpful. Thank you.

Thank you.

Thank you. And our next question comes from the line of John Pancari of Evercore.

Morning.

Morning, John.

Also, on the efficiency ratio outlook, thanks for that color. Just in terms of the change in the guidance and the pull-forward or the expectation that you could hit that lower -- below 60% level sooner, how would you describe the main driver of that change? Is that more of where you're coming in on the revenue? Or would you say greater progress than you initially anticipated on the expense side in the Consumer and corporate business?

Yes, I'd say it's both. I mean, it's a good combination of both. The environment from a revenue standpoint is increasingly better and then all -- just realizing all the things we've done from an efficiency standpoint on the expense side and then conscious of the things that we're continuing to do. So remember, we've set the sub-60% a good while ago. So what we're just trying to do is give more updated guidance that we'll reach that earlier. But as I said before, that's not a way-station. I mean, we expect to just wave at that on the way past. We'll continue to have improvements as we go along.

Got it. Thanks, Bill. All right. And then my follow-up is on the capital markets side. On the expense side of things, it didn't seem like we saw an expense impact from the better capital markets revenue in the quarter. Was it there? Or is it something that could be coming in next quarter? And then separately, on the capital markets revenue, I just wanted to see if we could get a little bit of commentary on your outlook there?

Yes, on the expense side, it's never sort of a perfect quarter-to-quarter match. So it's more important to look at it sort of on a broader base and the opportunities. And it was broader-based. I mean, the capital markets increases came from a variety of different businesses. Our sort of core M&A and core investments that we've made in our equity capital markets business we saw good activity from. We saw a little more on the interest rate derivatives side, so clients starting some hedging activity, which I think we probably would have even anticipated that earlier, and I think is a good indicator of things to come. We mentioned before investment banking from non-CIB is up 30% year-to-date. So that's creating capacity. We're in new markets. I think it's just a combination of things, but what I think most importantly is that it was broad-based, and it's reflective of our advice-centered strategy.

Got it. Thanks, Bill.

And our next question comes from the line of Ryan Nash of Goldman Sachs.

Good morning, guys, Allison, you talked about the trajectory of the net interest margin up 0 to 2 basis points that you guys have continued to beat over the last few quarters. And I guess, a two-part question. Just first, what's assumed within that in terms of betas? And then second, can you just talk about what you're seeing on the deposit side? You mentioned migration into CDs. Has there been any movement in terms of retail pricing? And just given that your loan-to-deposit ratio is in the 80s, can you talk about the appetite to pay up for deposits versus potentially optimizing on the deposit side?

Sure. So let me take your first one. In terms of our NIM guidance of 0 to 2 basis points in the third quarter, our assumption there is about a 35% beta. So a modest pickup in betas relative to the second quarter, kind of consistent with some of the upward pressure, and I think we're seeing a pretty broad-based right now. And just keep in mind that third quarter has an extra day relative to second quarter, so there's a little bit of a headwind there, which is what gets us back to that 0 to 2 guidance as we think about it. You are correct on CDs. You certainly see a pickup in CDs on our balance sheet. That's, for us, a very attractive cost of funding. We've been using that very deliberately as a tool to manage our asset rate sensitivity and control the pressure on betas as well. And as we think about our loan-to-deposit ratio and where that heads. I mean, certainly, that's going to be loan growth, in particular, is going to be one of the biggest drivers on that upward pressure on betas. If you think about second quarter relative to first quarter, our loan growth was a little bit softer. We were able to maintain betas a little bit lower. We're very pleased with -- I'm sorry, that was first quarter relative to fourth quarter. If you think about second quarter loan growth, which was a nice pickup in activity and balances, and you see that upward pressure on deposit betas as well. So going forward, betas and our loan-to-deposit ratio are going to be pretty closely correlated.

Got it. And then, Bill, maybe a question on capital. I guess, with this year's plan, you're clearly starting to make some progress in bringing the capital levels down. Do you still feel that running the capital somewhere in the 8s is the right level for the organization? How do you think about the mix in terms of the use of capital? And then second, just as the efficiency continues to improve and the capital comes out, where do you think returns to the organization could ultimately get to?

Yes. So I do think we still have more opportunity on the capital side, and we've said if there were an optimal capital level, it would probably have an 8% handle on it in some way. So that indicates 75 to 100 basis points in terms of opportunity. When and how we get there is, obviously, has a lot of factors attached to it. And I think the language and the thought process around tailored regulation and around speed are -- we've got more tailwind than headwind there than has existed in the past. What was the second part of the question?

Where do you think the combination of lower capital and improving efficiency could get [indiscernible]

Oh, yes, sure. Yes. We're at a nice inflection point in terms of total return right now. We're at a nice inflection point because we've got a good operating environment and particularly strong operating environment from a credit standpoint. We've said 14% to 16%. We're, obviously, sort of exceeding that right now. I think as we think through what a more normalized environment looks like, so think about what more normalized looks like long -- medium term and long term from a credit performance standpoint as well as get some more light and some more clarity around when we can get to a lower capital ratio, I think, will clear that up better. But I feel more confident about operating at the high end of that range than I do about being at the low end of that range, if that will narrow it a bit.

And next we go to the line of Ken Usdin of Jefferies.

This is Amanda Larsen on for Ken. The fee performance this quarter was quite strong in wholesale, including the IB and trading as noted, and a bit weaker in mortgage from the lower gain on sale margins and elevated decay as you noted. Looking at 3Q, can you help us level set on some of those significant items that may or may not repeat?

Yes. I'd rather not sort of go Q-to-Q, but let me sort of talk more at a higher level around both of those. I think in mortgage, we're now entering into a normalized purchase market. And a normalized purchase market will have better second and third quarters on the production side, and will have more decay on the second and third quarters from the servicing side. So for mortgage, barring anything radically different, I think the second half might look a bit like the first half, and it'll be weighted a little differently with production and servicing. As it relates to the capital markets business, we feel good about the pipelines, we feel good about the business. Obviously, the first quarter was a bit slower. The second quarter was more reflective, I think, of the opportunity that we have within our business. So if we look there on a first half to second half, I would expect the second half, given economic opportunities and no major upsets in the market, would be better than the first half. Does that help?

Yes.

And next we'll go to the line of Erika Najarian of Bank of America.

I just wanted to ask a little bit more about your comments, Bill, earlier about waving at 60% or sub-60% efficiency ratio on your way past. As you think about the progress and the constant optimization the company has undergone and the revenue potential, I'm wondering where you think the tangible efficiency ratio potential is going to be from a range perspective over the medium term and how you define the medium term?

Yes. I mean, I've said, Erika, without wanting to sort of put up a final label because then that assumes that you're complete. So this -- in my mind, this process doesn't have a finality attached to it. So if you define the medium term as 2 to 4 years, I sort of -- I said we have -- I can see several hundred basis points of opportunity within that time line and range. I want to be careful about getting caught up to a quarter-by-quarter or a really specific guidance as it relates to that only because I don't want to limit the company in terms of our ability to invest and the opportunities that we may see. So I'm not trying to be clever, but just trying to say we do have more opportunity. We can see that over the medium term, but we don't want to put a final number in place because this isn't embedded. I mean, this is part of what we do. This is the culture of our organization. This is not a project. This is not a one-time thing. This is not something that's over. This is just now how we run our company.

Got it. And as a follow-up question to that, Allison, I just wanted to inquire about your comments on the net interest margin and wanted to make sure I didn't misunderstand it. So you've mentioned that each subsequent Fed rate hike would be less impactful positively for the margin, and you're guiding 0 to 2 basis points of margin expansion in the third quarter. Does that mean that for each subsequent rate hike beyond June that funding cost repricing will offset asset yield repricing? And as -- just really quickly on that, as we think about the balance between deposit pricing and alternate sources of funding, could you give us a sense of what the cost is of new alternate sources of funding if necessary?

So let me take the first one on NIM and the value of a Fed rate hike. As betas are around, let's call it, 30% or so where they've been today, then the value of a Fed rate hike is about 2 basis points of NIM for us. So as betas increase, the value of that Fed rate hike starts to come down. It starts to be neutral to NIM, somewhere around a 50% beta. So as you think about our guidance for the third quarter, and going forward, it's just -- it's really a function of how much pressure there is on betas. As we think about alternate funding sources and what that could look like, again, a lot of factors that go into that, but it could be anywhere from 0 to 50 basis points depending on what we use and some are just the rate curve and the market pressure at the time.

And next we'll go to the line of Saul Martinez of UBS.

A couple of questions. If I could just follow up on -- actually on Erika's question first. Can you just talk a little bit about the glide path on -- of the 35% beta? And when you see -- or if you see us getting to a 50% beta during this Fed fund cycle, assuming a terminal Fed fund around the 3%, which is sort of the market expectation? Just curious how you look at that and where you think betas go from here.

Sure. So hard to say exactly when betas get to any sort of range, in particular. I mean, it's a function of 3 things: one, the absolute level of rates; two, the pace of rate hikes; and three, the level of loan growth that we experience. And so not being able to predict some of those things, we think it will take a few more quarters, but again, any one of those factors could change that.

Okay. No, that's helpful. And if I could just ask a bit of a broader question. I think you guys have been pretty forward-thinking in terms of digital banking and just technology overall and, at the same time, you've been reducing your branch footprint for a while and continue to do so. So I'm curious what your view is on the national digital banking strategy that a lot of your peers have adopted. Do you think that's a -- how do you think about that in terms of your own strategy? Do you think it makes sense, for example, as a deposit gathering tool or client acquisition tool?

If we define the term of a national digital bank as something that's a national platform that creates new channels and creates new clients, we've had a digital bank for a while, called LightStream. We've been primarily focused on the asset side of that equation, and it has allowed us to do all of that. It's allowed us to diversify our mix, and it's allowed us to acquire new clients. It puts us in a lot of markets where we weren't before. We've got other national businesses as well that we expand relationships with from indirect auto to mortgage correspondent, whatever it may be, that we have an opportunity to leverage relationships on a more national basis. Now that being said, on the liabilities side, we're pursuing that. We're sort of looking at our options and really haven't declared our preferred approach. But the advent of being in the national digital market to acquire new clients, we sort of think we've been on that forefront for quite a while.

Okay. That's helpful. But it is something, Bill, that you're kind of considering in terms of whether you think it makes sense for you.

Oh, yes, absolutely. As I said, I think we're exploring a lot of different options. We have some unique advantages, we think, with branding and investments that we've already made, and we want to make sure that we leverage those to their best advantage.

I'm going to jump in and let me just clear up one thing on my answer to Erika's earlier question on alternative funding sources. I just want to make sure that the cost of that is 0 to 50 basis points over LIBOR.

And our next question comes from the line of Steve Moss from B. Riley FBR.

I wanted to follow up on funding sources here. You've spoken a lot about the liability side. Wondering what is your appetite for using investment securities to fund loan growth as the curve flattens here.

I think that we're going to remain focused on keeping our investment portfolio generally consistent with the overall size of our balance sheet. Our investment portfolio is really there to help us manage our interest rate sensitivity. So as we think about funding loan growth, we're really thinking about deposits and alternative funding sources.

Okay. Got you. And then appreciate the color on the efficiency ratio guidance. I guess, just wanted more -- a little bit more of a housekeeping item. With regard to outside software expense, is that a good run rate going forward? Or is that just a one-time?

Yes, it's going to -- it fluctuates quarter-to-quarter. So it's not something that you necessarily annualize. But it is a reflection of some of the investments that we've made and the relative amortization of those investments take different forms relative to what we've done and the shelf lives and those kinds of things. So again, not to annualize the number, but also look at it as a positive investment towards the revenue and client-facing part of what we do.

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

Bill, can you give us your thoughts -- obviously, you guys have invested quite heavily in technology and have done a very good job with LightStream, as you know. Can you share with us, is the technology spend in the digitalization that you and your peers are doing, can you view that as table stakes, meaning, it just gets you into the ballpark, it doesn't give you the competitive advantage, and it really comes down to execution and delivering on the field? Or do you think, no, this is the competitive advantage that you have it and others don't?

The answer is yes. I mean, it's sort of both. It's both highly offensive and highly defensive in terms of how we think about it. We really approach the business very much as a digital first type of approach. I mean, that's been a fundamental change in our strategic thinking now for several years. And what you see from us is you see high adoption rates, really good increases in sign-ons. 28% or so of our sales in this quarter were digitally assisted. So I think there's a lot of meeting client expectations around the digital side. But then there are ways to use it and you mentioned LightStream as just one example. But just in expanding client relationships and managing data and analytics and leveraging AI to more fully light the way to financial well-being for our clients that we do think are competitive advantages. So I think it's a combination of both. And again, you've seen from us, I think, really good adoption from our clients and that's -- all of that's reflective in the results that we've been talking about.

Very good. And then as a follow-up, obviously, we've been through cycles, and we know what to expect in a credit cycle, and many banks, yours included, will underwrite loans maybe more conservatively or better after going through a tough credit cycle. With all the digitalization and the AI and all the technology you folks are using, how do you assure yourself that you're not over-reliant on this technology to protect yourself and it could, actually, lead you astray because you're not -- it's too much technology and it's not enough human common sense or human touch.

Yes. I'm staring at our Chief Risk Officer who is maybe offended by the lack of common sense...

No offense is intended.

No, I know, I know, I'm just teasing. I mean, I think, clearly, there is a lot of common sense embedded in the whole part of what we do. But I think the more sophisticated answer to your question is we stress it a lot. So we're constantly stressing the portfolio for virtually any way you can think about, stress it for rates, stress it for commodity prices, stress it for different economic environments. And I think that's sort of the litmus test is that we're constantly looking over the shoulder of our own decision-making to make sure that we're on the right track. And the most obvious public representation of that is CCAR. If you look at our portfolio under an adverse stressed conditions, we have continued now for several years to perform at a very low level, but most importantly, with a really low standard deviation. So this isn't something that's fluctuating CCAR-to- CCAR cycle. We've been very, very consistent in what we do. And as a total percentage of our automated underwriting, if you look at sort of our total portfolio, it's a pretty small percentage. I mean, at the end of the day, there is a lot of still human intervention supported and enhanced by digital capability.