SunTrust Banks, Inc. (NYSE:STI)
Q2 2014 Earnings Conference Call
July 21, 2014, 08:00 AM ET
Ankur Vyas - Director of Investor Relations
Bill Rogers - Chairman and Chief Executive Officer
Aleem Gillani - Chief Financial Officer
Ryan Nash - Goldman Sachs
Steve Moss - Evercore
Ken Usdin - Jefferies
Gerard Cassidy - RBC Capital Markets
Paul Miller - FBR Capital Markets
Mike Mayo - CLSA
Jason Harbes - Well Fargo
Welcome to the SunTrust Second Quarter Earnings Conference Call. All participants are in a listen-only mode until the question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections, please disconnect at this time.
I'd now like to turn the call over to Ankur Vyas, Director of Investor Relations. You may begin.
Good morning, everyone, and welcome to our second quarter 2014 earnings conference call. Thanks 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 within the Investor Relations section of our website, www.suntrust.com.
With me today, among other members of our Executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; and Aleem Gillani, our Chief Financial Officer.
Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.
During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, 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.
With that, I'll turn the call over to Bill.
Thanks, Ankur. So usual, I'll begin this morning with a brief overview of the quarter and then turn it over to Aleem for details on the consolidated results. I'll then wrap up my comments by reviewing our performance at the business segment level.
Reported earnings per share for the quarter was $0.72 on net income to common on 387 million. Earnings per share were negatively impacted by certain non-core items this quarter, primarily the resolution of the HAMP investigation, which was partially offset by the sale of RidgeWorth, our asset management subsidiary. We'll discuss both of these items in further detail later in the presentation. And where appropriate, we'll discuss our financial results on an adjusted basis to make sure the underlying core story is more clear.
The net impact of these items was a negative $0.09. And excluding them, earnings per share were $0.81 or net income to common of $436 million. This represented 19% growth in EPS compared to the second quarter of 2013 and was also 11% higher than the previous quarter. Our results this quarter reflected solid performance across a number of key areas, including continued broad-based loan growth, good deposit growth, increased non-interest income and strong asset quality performance.
Adjusted revenue increased 3% over the prior quarter and was relatively unchanged from prior year. Looking at the component parts, net interest income was relatively flat as the benefit of loan growth was offset by a decline in loan yields. Adjusted non-interest income increased $66 million relative to the prior quarter with solid growth across a number of fee income categories, most notably in investment banking. Compared to the prior year, adjusted non-interest income was relatively unchanged as higher investment banking and retail investment income negated the decline in mortgage related income.
Adjusted expenses were slightly higher than the first quarter as the seasonal decline in personnel expenses was offset by modest increases in certain cost categories and higher operating losses. Compared to the prior year, adjusted expenses were down 4% due to a decline in cyclical cost and our continued focus on overall disciplined expense management.
Maybe more importantly, our adjusted tangible efficiency ratio declined 130 basis points sequentially and 230 basis points compared to the prior year. The sequential process reflected the solid revenue momentum we generated this quarter, which is we've said before will become an increasingly important component of achieving our efficiency ratio goals. Our performance this quarter brings our year-to-date adjusted tangible efficiency ratio to 64.2%. And while this keeps us on track to achieve our better than 64% goal for the full year, it certainly does not reduce our focus on executing the revenue and expense initiatives throughout the company.
Average performing loans increased 2% sequentially, driven by growth in our C&I, commercial real estate and consumer portfolios. In particular, I'm pleased with the breadth of our loan growth as it's across many industry verticals, lines of businesses and geographies. This is the result of our concerted efforts to better diversify our business mix. Average client deposits were also up 2% compared to the prior quarter with a favorable mixed shift towards lower-cost deposits continuing.
Our credit quality performance continues to be on a positive trend. Non-performing loans declined 3% from the prior quarter and 21% from last year, while the net charge-off ratio remained steady at 35 basis points. We also completed some modest balance sheet management actions this quarter in order to reduce risk, improve the liquidity and increase long-term returns. Aleem will cover the details of these actions later in the presentation. Finally, our capital position remains solid with tier 1 common estimated to be 9.7% on both the Basil I and Basil III basis.
Our recap, we achieved core operating momentum across each of our businesses, while maintaining strong fundamentals in the form of our asset quality and capital position. Completing the sale of RidgeWorth and resolving key legacy mortgage matters allows us to more firmly focus our efforts on expanding and deepening our client relationships and improving the profitability of our company.
I'll turn it over to Aleem to provide some more details.
Thanks, Bill. Good morning, everybody. Thank you for joining us this morning. Before we delve into our normal review of operating performance, I'll quickly review the significant items that impacted this quarter's results.
First, we completed the sale of RidgeWorth, which resulted in a $105 million pre-tax gains, which is modestly higher than the amount we advised when we announced the transaction. Second, we reached a definitive agreement with the government to resolve claims related to SunTrust Mortgage's administration of HAMP, which resulted in a $204 million pre-tax charge. And lastly, we recorded a $25 million net benefit related to the progression of certain previously disclosed legacy mortgage matters.
Excluding the impact of these three items, which in aggregate were negative $0.09 per share, earnings per share were $0.81, which as Bill said was 19% higher than the prior year and 11% higher than Q1 of this year. The year-over-year increase was driven by growth in investment banking income, higher mortgage servicing income given lower refinance activity, and improved asset quality, which benefited both the provision expense and our adjusted cyclical costs. These positive trends more than offset an $81 million decline in mortgage production income.
The sequential quarter earnings increase was driven by broad-based growth across most non-interest income categories and a decline in the provision expense due to improved asset quality, which more than offset a return to a more normal effective tax rate this quarter.
We'll now review the underlying trends in more detail starting on Slide 5. Net interest income was generally stable relative to the prior quarter as solid loan growth was balanced by loan yield compression. Net interest margin declined 8 basis points, primarily due to a 7 basis point decline in loan yields. The decline in loan yields was most notable in our C&I book, though we also felt this in our non-guaranteed residential mortgage and indirect auto portfolios. The drivers of our loan yield compression are a mix shift as wholesale banking is growing at a faster rate than the rest of the portfolio and continued competition in our markets and businesses.
While loan yields in the wholesale segment are typically lower, this is an isolated view that does not capture non-interest income and deposit revenue. Our focus is on meeting the full suite of our clients' needs and maintaining a disciplined view of entire relationship returns.
Securities yields declined 10 basis points sequentially due to a combination of lower reinvestment yields and higher premium amortization in the quarter as MBS cash flows increased. Compared to the second quarter of 2013, net interest income was also relatively flat as the aforementioned combination of loan growth and loan yield compression neutralized each other. Net interest margin declined 14 basis points compared to the prior year, primarily driven by lower loan yields, though modestly offset by lower deposit costs and higher securities yields.
Looking forward, we would expect full year 2014 net interest margin to decline compared to 2013, albeit at a slightly lower pace than the decline from 2012 to 2013, which was 16 basis points. This is primarily due to continued compression in loan yields and lower commercial loan swap income. You will recall that as our commercial loan swaps mature over the next few years, we become more asset sensitive, which is a conscious design of our balance sheet management strategy over the medium term.
Moving to Slide 6, adjusted non-interest income increased $66 million from the prior quarter, driven by broad-based growth across most fee income categories. Investment banking was the notable driver of growth, up $31 million sequentially, with strong client-driven momentum across most products and businesses. Mortgage production income increased $9 million sequentially or 21% as closed loan production increased 31% and gain on sale margins declined slightly.
Mortgage servicing income declined $9 million sequentially due to higher decay of the MSR asset, a result of increased prepayment speeds during the quarter. Retail investment services continued its positive trends, resulting from our ongoing focus on meeting more clients' wealth and investment needs. Trust and investment management income declined $14 million sequentially, driven entirely by the loss of RidgeWorth's revenue stream during June. For the five months ended May 31st, RidgeWorth contributed approximately $20 million to SunTrust's pre-tax income.
Service charges for deposits increased $5 million sequentially, primarily driven by normal seasonal patterns between the first and second quarters. Card fees were also up $6 million or 8% as our clients are increasingly seeing the value proposition of the SunTrust card offering.
Other non-interest income excluding the sale of RidgeWorth increased $27 million sequentially, primarily driven by a $19 million gain from the sale of government guaranteed mortgage loans, the details of which I will cover on Slide 10. Compared to the second quarter of last year, adjusted non-interest income was flat, as growth in mortgage servicing, investment banking and retail investment services counteracted the lower mortgage production income.
Let's now move on to expenses on Slide 7. Adjusted non-interest expense increased $17 million relative to the prior quarter and declined $49 million relative to the prior year. Personnel expense declined $37 million sequentially, primarily driven by the anticipated seasonal decrease in 401(k) and FICA related costs. This decline was offset by $11 million in higher outside processing and software costs and $5 million in marketing expenses, both of which are typically lower in the first quarter. In addition, other non-interest expense, excluding the $36 million legacy affordable housing impairment in the first quarter, increased $24 million driven by higher legal and consulting fees alongside of certain discrete asset write-downs.
Lastly, adjusted cyclical costs increased $21 million sequentially, primarily driven by an increase in operating losses, which as we have stated in the past can be variable. Excluding operating losses, we would not expect significant variability in cyclical costs going forward. Compared to the prior year, adjusted non-interest expense declined $49 million, which was primarily driven by lower cyclical costs and our continued focus on expense management, partially offset by higher personnel expenses which is primarily the result of targeted hiring and revenue producing positions.
As you can see on Slide 8 and as Bill mentioned, our adjusted tangible efficiency ratio improved 63.6% from 64.9% in the prior quarter as the revenue growth we delivered in the quarter was greater than the modest increase in adjusted expenses. This brings our year-to-date adjusted tangible efficiency ratio to 64.2%. We will need to continue to execute on our revenue and expense plans to achieve our less than 64% target for the full year 2014. Our long-term efficiency ratio target continues to be below 60%.
Turning to credit quality on Slide 9, asset quality metrics remained favorable this quarter, though sequential quarter improvements continued to moderate. Non-performing loans declined 3% sequentially and 21% year-over-year, driven primarily by continued improvements in the residential loan portfolio. The net charge-off ratio remained at 35 basis points. We sold $149 million of accruing TDRs this quarter that further enhance our asset quality position.
The financial impact of the TDR sale included $10 million in net charge-offs, a $16 million reduction in the allowance and therefore a $6 million reduction to the lower mass provision. While the TDR sale will not materially change our reported asset quality metrics, it will have a modest positive benefit on certain rating agencies and regulatory calculations. Improvements in asset quality and the TDR sale were the drivers of a $37 million sequential decline in the allowance, a 3 basis point reduction in the allowance ratio and a $29 million decline in the provision for credit losses.
Going forward, we would expect continued, but modest improvements in non-performing loans, primarily driven by the residential portfolio. We would also expect net charge-offs in the residential portfolio to drift modestly lower in the near term. However, commercial and consumer net charge-offs are already at or below normal levels and will at some point revert to the mean. Over the near term, we would expect the allowance to remain generally stable as any asset quality improvements may be counterbalanced by loan growth. And as a result, the loan loss provision should roughly approximate net charge-offs. However, as you know, the ultimate level of reserves will be determined based on our rigorous review processes.
Turning to balance sheet trends on Slide 10, average performing loans increased $2.3 billion or 2%. Growth was driven by the C&I, CRE and consumer portfolios and partially offset by a slight decline in the residential portfolio. C&I loan growth was broad based and driven by the commercial auto dealer group alongside increases across most CIB industry verticals. CRE loans were up 8% sequentially due to growth in our institutional business, success in our REIT platform and a portfolio acquisition. Consumer loans were also up modestly, given growth in our consumer direct, indirect auto and credit card portfolios.
Average residential loans declined approximately $600 million, driven by legacy asset run-off and the impact of targeted balance sheet management actions. We sold $325 million of government-guaranteed mortgages this quarter, which resulted in the aforementioned $19 million gain reported in other income. We also sold $149 million of accruing TDRs, which I previously discussed. In addition, we transferred $2.1 billion of government-guaranteed mortgages to loans held for sale in anticipation of selling those loans during the third quarter.
We currently plan on reinvesting the proceeds of the government-guaranteed mortgage loan sales into high-quality liquid securities that are compliant with the forthcoming LCR requirements. We expect the resulting balance sheet profile to be revenue-neutral and LCR-positive. Pro forma for these actions we expect to be substantially compliant with the proposed LCR rules issued last year.
Relative to the prior year, average performing loans increased $9.8 billion or 8%, driven by broad-based growth across most portfolios. We continue to do our part to support our clients and to help grow [ph] the income.
Turning now to deposit performance, average client deposits were up 2% compared to the prior quarter and 3% compared to the second quarter of 2013 as solid growth in low-cost deposits was partially offset by timed deposit run-off, in particular maturities of our higher-cost CDs. This continued favorable shift in deposit mix helped move interest-bearing deposit costs down by 2 basis points and 6 basis points respectively compared to the prior quarter and prior year.
Slide 12 provides an update on our capital position. Tier 1 common equity expanded by approximately $300 million as a result of growth in retained earnings, while the estimated Basil III common equity tier 1 ratio stayed stable at 9.7%. Tangible book value per share increased 3% from the prior quarter and a full 10% compared to the prior year due to the growth in retained earnings and higher AOCI.
During the period, we increased our quarterly common stock dividend from $0.10 to $0.20 per our previously approved capital plan. In addition, we repurchased $83 million in common stock, which was modestly lower than originally planned, given guidance the industry received from the Federal Reserve in the second quarter. This guidance limits a bank holding company's ability to make capital distributions to the extent, but its capital issuances including employee share-based compensation are less than the amount indicated in its submitted capital plan.
Given this new guidance and our forecast for employee-related share-based compensation, our gross four quarter buyback program will be approximately $50 million lower than the $450 million maximum in our original capital plan. The net share dilution impact from this change is immaterial.
With that, I'll now turn things back over to Bill to cover the business segment performance.
Okay. Thanks, Aleem. The core operating momentum generated in each of our business segments helped drive the overall solid quarter corporate results we've discussed this morning. And our consumer banking and private wealth management business net income was up 7% compared to the prior quarter and prior year. The momentum in this business is improving in both non-interest income and from lending activity.
I'm pleased with the growth in retail investment income as it's evidence of the partnership between our Premier Banker's branch managers and financial advisors all centered around better serving the savings and investment needs of our branch-based clients. Card fees are also up due to higher purchase volume related to clients' increased utilization of our credit card product. Our focus in these areas is particularly important, given the pressures on more traditional consumer banking related fee income sources.
Consumer loan production was strong this quarter, up 18% year-over-year, driven mainly by growth in our credit card and LightStream businesses. This growth however continues to be muted by run-off in our home equity portfolio. Provision for credit losses declined both sequentially and year-over-year, driven by continued improvement in the asset quality of our home equity portfolio.
Expenses were up 6% in this segment compared to the prior year, driven primarily by targeted investments in revenue-generation positions, particularly in the wealth and investment side of the business in addition to some smaller discrete charges incurred in the current quarter, all of which are focused on improving the long-term efficiency ratio.
We continue to make progress in this segment. Our investments in technology and people combined with early efficiency initiatives and continued credit improvement are tracking positively against the impact of low rate environment.
Now let's take a closer look at our wholesale business. Our wholesale business posted a very strong quarter with net income up 7% year-over-year and 21% sequentially. In particular, we delivered a record performance in investment banking fees, which was the primary driver of the notable non-interest income growth during the quarter. Our performance here is reflective of consistent investments we've made in CIB over the past few years. The recent success can be attributed to expanding product capabilities as M&A and equity related revenues in particular were more accretive to our overall capital markets product performance. We're also doing a better job of serving our corporate and commercial banking clients' capital markets needs, which is evidence of our improving client reach.
Net interest income increased 6% year-over-year due to good loan growth and deposit growth. The continuing declines in loan yields counterbalanced some of this growth. Wholesale loan growth momentum continued as average loans grew 4% sequentially and 15% year-over-year. Loan growth was broad based led by CRE, commercial auto dealer, corporate banking expansion activities and CIB's asset securitization and energy practice groups. Deposit growth was also solid with increases across each line of business.
Our pipeline has also increased this quarter, which is normally a good predictor of wholesale loan growth prospects that are for the remainder of the year. Competition however remains tough, which may lead to ongoing pricing pressure. Our focus will remain on serving our clients, financing the growth needs, while ensuring we earn an appropriate overall relationship return. We continue to invest in our wholesale business to broaden our client base and better serve their needs. We've opened offices outside our traditional regional markets and are pleased with our progress thus far in our ability to attract talent and business. More broadly, we're optimistic about the growth and profitability outlook of this segment.
Now moving on to mortgage, as we previously disclosed, we resolved certain key legacy mortgage matters this quarter. First, we announced definitive agreements with the government to resolve FHA related origination matters alongside the national mortgage servicing settlement. Secondly, as discussed earlier, we entered into a settlement agreement regarding our administration of the HAMP modification program. These agreements resulted in significant cost, but settling them was the right course of action for our shareholders, team mates, communities and clients.
Excluding the impact of legacy mortgage matters this quarter, mortgage banking net income increased 17% sequentially. Getting this business to a level of sustained profitability is an important goal, and this quarter's performance is another step in that direction.
Taking a closer look at revenue, non-interest income increased sequentially as higher production income and the gain on sale of guaranteed mortgage loans more than offset the decline in servicing income. Total closed loan volume increased 31% sequentially, driven by increased purchase originations associated with the spring and summer selling season. Adjusted expenses were stable sequentially, a solid accomplishment that reflects the continued focus on our cost saving efforts which neutralized the higher cost typically associated with improved production.
Provision declines continued given the ongoing improvement in the credit quality of the residential mortgage portfolio. The mortgage market continues to improve, albeit at a lower rate than we and the industry had initially expected at the beginning of the year. The market continues to be supportive by good overall affordability, though inventory level's building activity in the amount of first time home buying continued to dampen broader mortgage origination volumes.
With the resolution of additional legacy mortgage matters this quarter, we can further sharpen our focus on meeting more of our client needs and generating sustained profitability in the mortgage segment.
So in summary, this quarter's consolidated performance reflected solid momentum across each of our businesses, particularly on the revenue side. Our markets are exhibiting favorable macroeconomic trends and housing continues to improve. Our clients from consumers to small business to corporate feel increasingly positive about their prospects and we continue to invest in our team mates and businesses to ensure we can light the way to their financial wellbeing.
Ankur, I'll turn it back over to you for Q&A.
Thanks. Wendy, we are now ready to begin the Q&A portion of the call. As we do so, I'd like to ask the participants to please limit yourself to one primary question and one follow-up in order that we can accommodate as many of you as possible today.
(Operator Instructions) The first question today is from Ryan Nash with Goldman Sachs.
Ryan Nash - Goldman Sachs
Just if I can start on the efficiency ratio, as we think about the back half of the year and into 2015, I guess first for the second half, I know you guys were looking at $1.5 billion worth of expenses. While it doesn't sound like you're going to be giving us formal cost targets there, is there any of that in the current run rate and should we expect to see another step-down in costs from that program? And then second, I know you're probably not ready to give us 2015 guidance at this point, but can you just talk about what you think some of the key levers are going to be for you to make efficiency improvement in 2015 just given the $235 million-or-so fall-off from swap income?
Most importantly, what we're continuing to focus on is our below-64% efficiency ratio for this year. And I think we made some good progress this quarter. As we highlighted, we're going to start reaching inflection points where we want revenue to be a larger component of that efficiency ratio. Achievement in this quarter was while maybe not the inflection point, maybe good evidence of the starting of an inflection point.
As it relates to the ops costs that we've talked, sort of $1.5 billion that we're underway, I mean we have roughly 100 different specific projects against all of those opportunities. And they're in the type of areas you'd expect ATM, consolidation of how we process, call centers, lending centers, vendor relationships, check image and branches. The list sort of goes on and on as they're set up to up to 100 different things.
The reason that we've been careful about assigning a number to that I think is probably evidence in this quarter, because we're going to make sure that we continue to also make the investments long term and our ability to achieve the revenue that we need. So I feel good about where we are on the ops cost. How much of that will actually manifest itself in '14 will really be dependent on sort of how we look at our additional investments on the revenue side.
So let me come back to the expense point just for a moment. Part of your question was will we see another step-down. And I think the answer to there is generally no. We saw the big step-down already and that was from 2012 to 2013. And you saw what we did then was take a full 13% out of our expense base between sort of '11 and '12 rate now into the '13 and '14 rate. So the big step-down in costs I think has already happened.
In the near term, as I look at our overall expense base, we're managing it within that sort of $1.3 billion to $1.4 billion level quarterly and that of course is revenue dependent. If revenue stays where it is or falls, you'd see that number come off a little. If revenue moves up considerably, you'd see that expense number probably move up to where the top end of that range. And I think you saw a little bit of that this quarter when revenue is this quarter up about $60 million and expense is up about $20 million. So that kind of a ratio, that's a trade we'd take any day to continue to grow our improvement in efficiency and continue to get the efficiency ratio down. As you heard Bill say, that's what we're really focused on, becoming a more effective, more efficient company and a little bit less orientation toward the exact expense number.
Ryan Nash - Goldman Sachs
And if I can ask one follow-up, more longer-term, when we think about your asset sensitivity, I know we've spent a lot of time talking about the impact of the swap roll-off over time. However, when I look at Slide 9, you've done a lot to improve the deposit base and you highlighted that in the prepared remarks. And we've heard peers talking about a pretty wide range in terms of potential outflows. So just can you remind us in your plus-3.2%, what you're assuming for both outflows and deposit betas? I think on my math, you were at about a 60% beta last cycle. However, given some of the improvements that you've made in the base, I would expect that to be lower this time. So any color you can provide there would be helpful.
Yeah, of course, it's really difficult to say, because it depends very much on exactly how the rate cycle changes, how rates move, whether it's more long rates or more short rates or whether they go in parallel, what the economy looks like at that time. Having said all of that, when we think about it and we think about the last time around and what could happen this time, it seems to me that we're going to see deposit betas mostly for the industry in that sort of 40% to 70%. To your 60% number I think is dead on. But I would also say that given the enormous amount of liquidity there is in the system that deposits rates probably lag somewhat as overall rates go up, that there's probably no need for deposit rates to move up quickly as overall rates move up. And so I think this time could be a little bit different as we think about what betas look like, just because there is so much more liquidity overall in the system this time.
And, Ryan, I think you're accurate to point out all the change in the construct of our deposit base as well. I mean on deposits now are less than 15% of our total deposit base. So there has been a lot of change. And as you can imagine, deposit betas is a rich discussion that we have maybe daily in the company.
The next question is from John Pancari with Evercore.
Steve Moss - Evercore
This is Steve Moss for John. Regarding loan growth here, you guys sounded a bit more optimistic in terms of the overall balance sheet trends. Should we look for a pickup here with regard to loan growth? And then the second part, I did notice that the commercial real estate loan growth did slow. Wondering if you could give some color on those dynamics?
I mean this was a very good loan growth quarter. We indicated that we're optimistic about pipeline and things that we see. But I want to be careful about sort of taking this quarter and extrapolating it long term, because it was a very, very particularly good quarter. As it relates to CRE, it's going to just be bumpy on the way up. It's up 42% sort of year-over-year. So any one individual quarter, based on something we might do off a smaller base, is going to be a little bumpy. So I still feel very good about CRE. I feel very good about the track we're on, quality of the assets that we're adding and the long-term opportunity. I haven't changed my view on that a bit related to this quarter.
The next question is from Ken Usdin with Jefferies.
Ken Usdin - Jefferies
My first question is just about net interest income. It looks like, Aleem, to your point about the core compression, you're kind of running in place on a core NII basis if I take out the hedge benefit. And noting your slide with the updated data, can you talk us through whether or not it's reasonable to expect core net interest income to grow from here? And with the loan growth, can you see any acceleration in core growth or will the core NIM compression keep you kind of just running flat for now?
I think you almost gave up the answer right in your question. Obviously NII is overall very loan growth dependent. As we look at loan growth and as we look at a continued grind downward in NIM, we are expecting and we hope to be able to deliver NII that does continue to grow year-over-year. The full year this year, we're expecting and we hope we will be able to sell more than last year. But as you said in your question, it is loan growth dependent. Our frontline team mates have been able to deliver a very steady nice loan growth to us so far this year. And if we can continue that, we are looking to see NII continue to move up and offset that decline in margins.
Ken Usdin - Jefferies
Is it fair to say that that's a trend that you could expect next year, because I know it's early to give explicit guidance on next year? But the swap roll-off looking to be about $240 million or so next year, do you think you can also produce NII dollars growth on a reported basis as you get into '15 as well?
Well, that's what we're going to be working hard to do. Obviously, again very economy dependent. But if the economy does continue to grow the way we expect and we're able to meet more client needs across more of our footprint in all of our segments, then that's what we're going to be targeting.
Ken Usdin - Jefferies
Just my follow-up on that will just be then on the NIM on the core, you mentioned all-in NIM being down a little bit less than this year. But do you see the core NIM stabilizing any time soon from that loan yield compression or is there just until rates go up a kind of continued drip in the NIM?
Ken, that's a really good question. I think there is a continued drip in the NIM for now. But if you assume that rates don't fall anymore from where they are today, I do think NIMs will start to stabilize in 2015. They will grind down between now and then. But assuming overall rates don't fall anymore between now and then, I think we will see stabilization next year.
We always tend to delink NII and non-interest income, and I think they need to be better linked. I mean you can see the focus that we've had on building out our fee capability, probably CIB and investment banking or the most notable examples of that, but they're linked. So we see good growth in C&I loan growth. It's under a lot of margin pressure. But you can also say we're driving a lot more fee income off that loan base. Our average fee is up about 30% year-over-year. So our effectiveness and sort of moving from that right side to that left side and being more impactful for what we can do for clients, those two things are linked. I think it's important to maybe think about them together.
The next question is from Gerard Cassidy with RBC Capital Markets.
Gerard Cassidy - RBC Capital Markets
Your capital is obviously very strong. And when you came through the CCAR, I think your capital was reduced by less than 200 basis points during that process. What's your guys' view on what's a comfortable tier 1 common ratio that you want to get to once we finally get through these CCARs and everybody knows what to expect in a year or two?
I think over time we're getting more and more clarity on this as the regulatory view and the industry view converges. I'll tell you I don't think we have perfect clarity today, but I'm feeling better about where we are today relative to where we were a couple of years ago. If I think about where I think we'll end up, you've got to start with the regulatory numbers, you have to start with 7. Add on a sort of potential SIFI buffer, whatever you think that will be. And then we'll have our own internal board that buffer on top of that, of course because we never want to go through the SIFI buffer. So you put all those together and it's a number that starts with an 8 and that's a little bit more clarity than I'd say we had a couple of years ago.
I don't think I can tell you today whether it's a low-8 or a high-8, but I think it starts with an 8. And then it depends on how the stress test change over time. I think we're getting more and more visibility into the CCAR process, the nature of those tests and the effect that those tests are going to have on the industry overall and on us. But having said all that, it's 9-somewhere today. So over the medium term, whatever the medium term is, I would be looking for a stability in the short term and a decline in the medium term toward some number that starts with an 8-somewhere.
Gerard Cassidy - RBC Capital Markets
You guys mentioned on the call about the margin coming down a bit due to a greater presence of the wholesale portfolio getting larger. What's causing the C&I loans in your average yield table where the yield in the C&I loans was down a fair amount? Is it just competition or what's causing the yield compression in the C&I loan portion of the loan book?
Well, overall, there're two points that you referenced, Gerard. One is that our overall portfolio mix is changing. You'll recall that going into the financial crisis, we were very much oriented toward residential mortgage, but perhaps overly concentrated in that product line. And over the last several years, we've been working hard to optimize the mix within our balance sheet, become more diversified.
One of the effects of becoming more diversified and reducing the sort of future risking as in volatility of our earnings is that as wholesale grows as a component of our overall mix, wholesale yields are a little bit lower than retail and consumer yields. But that's one of the things that's bringing margin down a little bit. The other thing is just the sheer amount of competition in the C&I space overall. And as overall margins decline in that space, that's affecting us too.
One thing you might want to look at that might help you is if you look for example that BBB bond spreads and look at how they've changed over time, you'll see that quarter-over-quarter, BBB bond spreads dropped 18 basis points Q1 to Q2. That's kind of the space in which a lot of regional banks play in when it comes to meeting corporate client needs. So that's one of the things that's affecting us.
The next question is from Paul Miller with FBR Capital Markets.
Paul Miller - FBR Capital Markets
Can I go back and talk about the RPL to TDR sales? You said in the prepared remarks that you sold about $149 million. Did you take a loss on that? I can't find it in the documents. Did you take a loss or a gain on that sale?
Maybe here is the way to think about that, Paul. We took a charge of $10 million on that sale. However we already had $16 million in reserves that were specifically identified to that portfolio. So the net effect of everything was actually a $6 million reduction in our provision expense for this quarter.
Paul Miller - FBR Capital Markets
You have about close to $2.6 billion of this stuff sitting on your balance sheet still, because right now we're hearing that the pricing for RPLs is very competitive. Is there plans to sell some more of that down?
Well, we've got a pretty good experience this quarter. The net effect of that sale was $6 million reduction in our provision expense and an improvement in some of our credit agency and regulatory metrics. So pricing is good. We're set well. We've got a good experience. We don't have immediate plans to sell any more right now. But what we learned the last quarter I think was helpful as we think about our overall balance sheet profile as we look into next year.
Paul Miller - FBR Capital Markets
I know there's different prices for stuff that's been current for 24 months versus current for 12 months and stuff like that. I was just interested in what type of stuff you sold?
I'm sure Ankur and team would be happy to talk with you.
The next question is from Mike Mayo with CLSA.
Mike Mayo - CLSA
Could you elaborate more on Robinson Humphrey? You said you had record investment banking fees. It looks like the revenues grew twice the pace of the five big banks. Just give some color on maybe the mix. You mentioned equities and mergers if you can mention the net income, ROE. It seems like it's over half of wholesale. So more disclosure would certainly be appreciated. And then lastly, you mentioned your capital ratio should start with an 8, whereas the largest investment banking players have capital ratios that start with at least a 9. So are you looking to maybe price more competitively?
The 9 might work well for the large investment banks, sort of the Wall Street banks. That's really not us. We're a main street bank and the business that we do in our corporate investment banking set of businesses is really very much aimed at meeting client needs. So given the size of our business and given how vanilla it is relative to some of the more complex businesses that you might be used to covering, the overall capital ratio for us in the context of mix against the rest of our portfolio, the consumer business, the private wealth business, the mortgage businesswe think makes much more sense for us to be in the 8 level rather than the 9 level.
And then, Mike, I'll also talk about the fees side of the business. And as you know, this is an area that we've been investing in starting with the acquisition of the institutional business of Robinson Humphrey, but making sort of continued and steady investments in virtually all parts of that business. The bulk of that, let's call it, 60% to 70% would be in the syndication high-yield bond origination, investment-grade bond origination, tax exempt bond origination, so to think about as the traditional debt part of the business and that's just continued to track up sort of consistently every quarter rationalized for every quarter.
And then what we talk about is just more kick in on the M&A part of the business, more kick in on the equity part of the business. So instead of an eight-cylinder engine hitting on six cylinders hard, all eight cylinders are now starting to pump pretty aggressively. Relative to the others, I mean you sort of think about one of the big differences is think about the trading component. So our trading business is very issuer-driven and it was down about 6%. Others were down obviously multiples of that in the larger course. So that might explain a little bit of the difference.
And again, ours is just reflective of continued investment, continued slogging it out, adding good talent, high receptivity from our clients. I think they have been very receptive to a middle market investment banking business with capital.
Mike Mayo - CLSA
And I assume this is what you mean when you say grow revenues per every dollar of expense to improve your efficiency ratio. I think I missed your guidance for 2015 or maybe you didn't give it. So 2015 efficiency ratio, it was 63.6% in the second quarter. Where do you think that will be in 2015?
Mike, we haven't actually given guidance yet for 2015. We'll do so as we get closer around the end of the year.
Mike Mayo - CLSA
Is it safe to assume that it would be below 64% since that's your target for 2014 or will the run-off of swap revenues push that back higher?
Mike, we want to get better every year. We intend to become a more efficient company every year with a long-term target of below 60%. So directionally, it's safe to assume it will be down.
Our final question today is from Matt Burnell with Wells Fargo.
Jason Harbes - Well Fargo
Actually it's Jason Harbes from Matt's team. So just want to follow-up on loan growth. I mean it looks like your loan growth was best-in-class this quarter, but you sounded a little bit less optimistic looking into the second half. Just kind of wondering is that a function of the transfer of the guaranteed mortgages or are you seeing any signs of softening across any of your markets?
Let me be clear. I didn't mean to be less optimistic. I just want to be careful about annualizing the quarter too many times. Based on what we see with pipelines, what we see from our clients, utilization rates are being slightly up. Our availability being up as well as growth being up, I don't have the reason to be other than optimistic about where we are from a loan growth standpoint.
Jason, I appreciate you pointing out the $2 billion sale. Obviously that will affect our total loans. But as I said earlier, that $2 billion moves into securities and you expect the lower effect on the revenue to be immaterial.
Jason Harbes - Well Fargo
I guess my follow-up would be are you seeing any more or greater strength in the Florida market versus some of your other markets, any other noteworthy differences? I think in the past, Bill, you've talked about the Florida market being higher beta and the economy down there does seem to be outperforming. So just curious if you can give us any update there.
I'd say universally, we feel better about what's going on in the Florida market. Housing is certainly stronger virtually across every market and some markets very, very good. Our commercial activity in Florida is also good. Some of our top performing commercial units are in Florida. Our consumer business, like I've said before, never really had the fall-off, but it continues to be sort of consistent with the rest of the company. All the data we see on Florida and the time I spent there is positive. Tourism industry is sort of going gang busters. Net in migration back in to the state at a pretty high clip. Very good business environment, you've seen some corporate headquarters move to Florida. So I think we're actually seeing the other side of that beta right now.
All right. Thanks, everyone. Wendy, this concludes our call. Thanks to everyone for joining the call today. If you have any further questions, please feel free to contact the IR department.
Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.
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