SunTrust Banks' (STI) CEO Bill Rogers on Q4 2015 Results - Earnings Call Transcript

| About: SunTrust Banks, (STI)

SunTrust Banks, Inc. (NYSE:STI)

Q4 2015 Earnings Conference Call

January 22, 2016 08:00 ET

Executives

Ankur Vyas - Director, Investor Relations

Bill Rogers - Chairman and Chief Executive Officer

Aleem Gillani - Chief Financial Officer

Analysts

Matt O’Connor - Deutsche Bank

John McDonald - Bernstein

Betsy Graseck - Morgan Stanley

Ken Usdin - Jefferies

Ryan Nash - Goldman Sachs

Mike Mayo - CLSA

Marty Mosby - Vining Sparks

John Pancari - Evercore ISI

Operator

Welcome to the SunTrust’s Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the call over to Ankur Vyas, Director of Investor Relations. Thank you. You may now begin.

Ankur Vyas

Good morning and welcome to SunTrust’s fourth quarter 2015 earnings conference call. Thank you for joining us. In addition to today’s press release, we have 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 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, 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, I will now turn the call over to Bill.

Bill Rogers

Thanks, Ankur and good morning everybody. I will begin with a brief overview of the quarter and then turn over to Aleem for additional details, including our results at the business segment level. I will conclude with the review of our performance in 2015 as a whole in addition to providing some forward-looking perspectives.

We delivered solid results this quarter, which is a direct result of the focus we have maintained on executing our primary strategies of optimizing our business mix and balance sheet, investing in growth opportunities, improving efficiency and increasing capital return to shareholders.

For the fourth quarter, we reported $0.91 of earnings per share, which included $0.03 of discrete tax benefits. When adjusting for non-core items, earnings per share were stable compared with the prior quarter and prior year. Continued improvement in net interest income this quarter was offset by a decline in non-interest income as a result of challenging market conditions in addition to normal quarterly variability. Capital markets related income was in line with the prior quarter as the slowdown in fixed income markets was offset by higher equity origination fees and trading income, the latter, which was a result of increased client-driven interest rate hedging activities.

Overall, we are successfully deepening client relationships within our wholesale banking platform and benefiting from our diverse business mix and breadth of capabilities. We achieved our goal of attaining the sub 63% efficiency ratio and ended the year with an adjusted tangible efficiency ratio of 62.7%, 24 basis points better than 2014.

Looking ahead, we remain focused on achieving our long-term goal of the being sub-60% and we will continue to diligently manage expenses while also investing in strategic revenue-generating initiatives throughout the company. We continue to see the benefits of our active balance sheet management and optimization efforts, which drove a 4 basis point improvement in our net interest margin and a $34 million increase in net interest income. This is further realization of a positive shift in our overall earning asset and funding mix.

Average loans were up 2% compared to the third quarter driven by growth across most sectors, including commercial, consumer direct and residential mortgage. While loan growth will ebb and flow quarter-to-quarter, we remain confident in our ability to generate growth in segments where returns are appropriate and we can have deeper relationships. However, we closely manage areas that don’t meet those thresholds. Average deposits were also up 2%, which is further evidence of the success we are having in deepening client relationships across the company. Growing deposits remains an important part of our strategic efforts to strengthen client relationships and improve profitability, the latter of which is evidenced by the 35% reduction in long-term debt over the past year.

Overall asset quality remains favorable. However, we did see an increase in non-performing loans as a result of deterioration in our energy-related exposure, which Aleem will provide details on later. Provision expense was less impacted as we have been building reserves in the previous quarters. The net charge-off ratio was 24 basis points, a strong result, but likely unsustainable long-term. Lastly, our capital position continues to be strong with our common equity Tier 1 ratio estimated to be 9.8% on a Basel III fully phased-in basis.

So, with that as a brief overview, I will turn it over to Aleem to provide some more details on the quarter’s performance.

Aleem Gillani

Thanks, Bill. Good morning, everybody. Thank you for joining us this morning. Before I jump into the details, I would like to call your attention to a new table we are presenting on Slide 4, which highlights key metrics over the past five quarters and will help you analyze our financial performance in an efficient manner. As it is year end, we have added this slide to the main presentation and going forward, you will find this in the appendix.

Moving to Slide 5, you can see the net interest margin improved by 4 basis points driven by higher security deals as a result of slower prepayment speeds, further low cost deposit growth and lower long-term debt as we received a full quarter benefit of the $1.7 billion debt reduction in the third quarter. Net interest income increased $34 million sequentially driven by solid 2% loan and deposit growth and the 4 basis point improvement in NIM. As a result of our activity balance sheet management efforts, overall net interest income has been grinding higher since the first quarter, which we had anticipated would be the trough. For the full year, net interest income declined at 2% entirely due to a decline in commercial loan swap income as a result of lower fixed rates. In 2016, commercial loan swap income will decline modestly relative to 2015 largely due to an anticipated increase in LIBOR, which would be more than offset by higher net interest income from the core asset sensitivity of the balance sheet.

Looking ahead, we expect first quarter net interest margin to improve further 3 to 5 basis points relative to the fourth quarter. From there, NIM will likely be relatively stable for the remainder of 2016 assuming we only get one additional increase in the federal funds rate. We have been and will continue to carefully manage the duration of our overall balance sheet in light of the current low interest rate environment while also ensuring our balance sheet is structured to benefit from potential increases in short-term rates.

Moving on to Slide 6, adjusted non-interest income declined $32 million sequentially primarily driven by asset disposition gains in the third quarter and lower wealth management-related revenue in the fourth quarter partially offset by an increase in mortgage related income. Wealth management-related revenue declined $13 million sequentially partially due to seasonal trust fees typically earned in the third quarter, but also due to market conditions, which reduced assets under management and client activity. Investment banking income declined $11 million as fixed income originations were negatively impacted by challenging market conditions. Equity originations and M&A however remained relatively strong, which is a reflection of the strategic capabilities that we have expanded over the past few years.

Trading income increased $11 million driven by higher derivative marketing revenue as commercial clients increased their utilization of interest rate swaps to hedge potential changes in rates. Mortgage servicing income improved by $16 million due to higher servicing fees, some of which is seasonal, lower decay expense and better hedge performance. Mortgage production income declined $5 million as lower production was generally offset by improved channel mix.

Service charges on deposits continue to steadily decline, a reflection of the increased transparency and technology we are providing our clients so they can manage their accounts more effectively. This decline will continue in 2016, in part driven by enhancements to our posting order process which once fully implemented will help our clients save more money and reduce our service charges by approximately $10 million per quarter. This transition will occur in the second half of 2016. Compared to the fourth quarter of last year non-interest income was down 4% driven by declines across most categories, largely due to the challenging market conditions experienced in the second half of 2015.

Moving on to expenses on Slide 7, adjusted non-interest expense increased $35 million sequentially, almost entirely due to $32 million of discrete recoveries recognized in the previous quarter related to the successful resolution of previous mortgage matters. Outside processing and software costs were up $22 million due to higher utilization of certain third party services in addition to normal quarterly variability. Amortization expense increased by $8 million similar to last year’s increase as we invested additional capital in low income communities which was generally offset by a correspondingly lower provision for income taxes. Offsetting these increases was a $35 million decline in personnel costs driven primarily by lower accruals on certain incentive and medical costs as we calibrated expenses to actual performance. While quarterly incentive and benefits costs can be variable, for the full year incentive compensation increased due to improved business performance in 2015 which is consistent with our pay for performance philosophy. Compared to the fourth quarter of last year adjusted non-interest expense increased 2% driven by a combination of higher personnel expense and outside processing and software costs.

For the full year, adjusted expenses were down 1% compared to 2014 and have declined each of the past four years. In fact adjusted expenses are down 15% since 2011, evidence of our efforts to operate more efficiently. Separately, while not a non-interest expense point, I will highlight that the discrete tax benefits we have recognized in 2015 resulted in an effective tax rate of 28% for the full year, which is below what we would consider a more normal range in the low-30s. As we look to the first quarter of this year we anticipate personnel expenses to increase by approximately $100 million due to the typical seasonal increase of 401(k) and 5K expenses and also return to more normal accrual rates on incentive and benefit costs. In addition, our marketing and customer development costs will weigh more heavily in the first half of the year versus the second half as we are introducing a new campaign to further advance our purpose as a company. Bigger picture, after four consecutive years of declines, we expect 2016 expenses to be higher than 2015 as we expect revenues to improve. We will maintain our focus on the efficiency ratio and if revenue do not materialize we will have to adjust our expense base accordingly.

As you can see on Slide 8, the adjusted tangible efficiency ratio was 62.2% in the fourth quarter, up slightly over the prior quarter and year. Our full year adjusted tangible efficiency ratio was 62.7%, better than our 2015 target and 24 basis points better than 2014. For 2016, we are targeting revenue growth that exceeds expense growth and thus a tangible efficiency ratio that improves. That being said, the pace of improvement will be significantly lower than previous years as our core expenses have already declined substantially and the operating environment while improving in certain areas remains challenging overall. Nonetheless, we remain firmly committed to our long-term target of sub-60 %. And achieving this important objective will be a key driver of delivering additional value to our shareholders.

Turning to Slide 9, overall asset quality remains solid during the quarter evidenced by a 24 basis point net charge-off ratio and a 49 basis points NPL ratio. We did experience a deterioration in our energy portfolio, which when combined with the proactive NPL sales in prior quarters resulted in an NPL ratio that was 14 basis points higher sequentially, but very much in line with last year. As it relates to energy, not much has changed with regard to our exposure and mix. The energy portfolio is 2.2% of the total loan portfolio which is down 11% over the past year. The exploration and production and oil field services portfolios which are the most negatively impacted by prolonged low oil prices represent a little under 40% of the total energy portfolio or slightly under 1% of total loans.

Our reserves for the energy portfolio are approximately 4.5% and when isolated to the two most severely impacted sectors are near 12%. In addition, total reserves of $1.8 billion have been designated to cover inherent losses in our total loan portfolio. Losses in the E&P and oil field services portfolios will be elevated over the next couple of years and will thus cause overall C&I loss rates to rise from their low levels today. However, given all of the factors I mentioned we believe our energy related risk remains very manageable in the context of the overall company. The provision for credit losses increased $19 million sequentially and the ALLL ratio declined 5 basis points to 1.29% consistent with overall credit quality trends.

Looking ahead, we expect non-performing loans and net charge-offs to increase, primarily as a result of further stress on the energy portfolio. Despite this we would still expect the company’s overall net charge-off rate to be less than 40 basis points in 2016. Provision expense this year will more closely match net charge-offs as the multi-year improvement in asset quality abates. Ultimately our reserves will be determined by our rigorous quarterly review process which is informed by trends in all of our loan portfolios combined with the view on economic conditions.

Let’s turn to balance sheet trends, average performing loans were up 2% sequentially driven by continued momentum in our commercial and consumer portfolios in addition to lower levels of pay-offs. Commercial loan growth was broad based and driven by corporate, commercial auto dealer and commercial real estate clients. While consumer loan growth was driven by growth in direct, indirect and guaranteed student loans. The momentum in the consumer direct portfolio continues to be strong, driven by LightStream’s, our partnership with GreenSky and further success with our credit card offering. On a year-over-year basis, average performing loans grew $2 billion or 2% driven by 3% growth in C&I and 13% growth in consumer direct and was partially offset by declines in home equity, pay-offs in commercial real estate and reductions in indirect consumer loans given our focus on returns. In total, we have proactively sold or securitized approximately $5 billion of loans since the middle of 2014. Going forward, we will periodically sell or securitize lower return loans as part of our balance sheet optimization focus, though likely not at the pace of the past 18 months.

Turning to deposits on Slide 11, average client deposits were up $2.9 billion or 2% compared to the prior quarter and 8% compared to the prior year, driven by growth across most lines of business. We are pleased with the momentum on the deposit front. Our success here reflects our overall strategic focus on meeting more clients’ deposit and payment needs, supplemented by investments in technology platforms and client facing bankers across both the consumer and private wealth and wholesale sectors. In particular, our corporate liquidity product specialists within wholesale banking continue to do an outstanding job of deepening client relationships with our treasury and payments product offerings. And as Bill referenced earlier our strong deposit growth directly enabled us to reduce higher cost long-term debt by $4.5 billion or 35% in just the past year. Importantly, the strong growth we have delivered has not resulted in any adverse changes in rates paid or mix. Low cost deposit growth continues to be strong while higher cost deposits have been gradually declining. As interest rates rise, some of these trends will reverse. However, we will maintain a disciplined approach to pricing with a focus on maximizing the value proposition outside of rate paid for our clients.

Slide 12 provides an update on our capital position, which continues to be strong. Our estimated Basel III common equity Tier 1 ratio on a fully phased-in basis was up 9.8%. Tangible book value per share was stable sequentially and up 6% compared to the prior year driven by growth in retained earnings partially offset by lower AOCIs as a result of higher interest rates.

For our 2015 capital plan, we repurchased $175 million of common stock and paid a $0.24 dividend in the fourth quarter. In addition, we repurchased an incremental $39 million of common stock in December, which reflects our overall commitment to increase capital return to shareholders. We expect to repurchase approximately $350 million of additional common stock in the first half of 2016 to complete our 2015 capital plan. As a result of our capital return program, we are continuing to drive down share count. Average fully diluted shares outstanding were down 1% sequentially and 3% year-over-year. Lastly, as of January 1, the liquidity coverage ratio is now a formal requirement. We have started the year in full compliance and we will of course maintain that status over the course of 2016.

Moving to the segment overviews, we will begin with consumer banking and private wealth management on Slide 13. Net income declined 6% sequentially as elevated market volatility resulted in lower wealth management-related revenue. We also had a modest increase in expenses driven in part by investments in our card offerings as well as various one-time items. Net interest income was up 2% sequentially and 4% annually benefiting from continued low cost deposit growth and our balance sheet optimization efforts. The strong growth in our consumer direct portfolios has afforded us the opportunity to sell, securitize or reduce production in lower return areas. Deposits were up 1% sequentially and 6% for the full year, with much of this growth coming from deeper relationships with our mass affluent client base aided by our investments in premier bankers and the SummitView platform.

On a full year basis, CPWM posted strong net income growth of 8%, which is once again the result of strong deposit growth, our balance sheet optimization efforts and further improvements in credit quality. Loan balances declined 3% in 2015 as we sold or securitized approximately $2 billion of loans. But organic consumer loan production was solid and increased 5%.

Non-interest income declined 1% for the full year largely due to the headwinds wealth management faced in 2015, but also due to the continued decline in service charges. While current market conditions have made growing wealth management revenue more challenging, meeting more of our clients’ wealth and investment needs continues to be a strategic priority for our company.

Expenses in CPWM have been well-controlled as we have been using efficiency gains to invest in client-facing talent and technology. We continue to generate solid returns from our digital investments and expect this to increase as mobile adoption rates and digital sales trend upwards. Bigger picture, the progress we have made in optimizing the balance sheet, meeting more client needs and investing in technology has helped offset the negative impact of the prolonged low rate environment. We are optimistic about the long-term trajectory of this business both as it executes against its strategic priorities and as the value of our strong deposit franchise is more fully realized in a normal interest rate environment.

Moving to wholesale banking on Slide 14, we had a solid quarter in spite of the challenging market conditions. Revenues were down 3% sequentially, but stable relative to the prior year. Much of the decline in revenue was driven by overall market volatility, which not only impacted debt origination activity, but also resulted in adverse mark-to-market impacts. Partially mitigating these impacts was strength in other product areas, such as equity originations, equity sales and trading and derivatives marketing, a reflection of the increasing diversity of our business model.

Net interest income was up 1% sequentially as a result of strong loan and deposit growth partially offset by margin compression. Overall, net income declined 9% sequentially as a result of the declines in non-interest income and increased provision expense. While we have been building reserves for our energy exposure since the fourth quarter of 2014, the prolonged low oil price environment will continue to place pressure on the provision expense in this business.

On a full year basis, we saw strong performance with a record year for wholesale bank, demonstrated by the 9% increase in net income driven by broad-based revenue growth partially offset by energy-related reserve increases. Net interest income was up 6%, driven by 8% loan growth and 16% deposit growth. The loan growth was broad-based across each line of business and most industry verticals partially offset by intentional reductions in lower return areas. The deposit momentum within this business also continues to be strong, evidence of the success our liquidity specialists within wholesale are having and the enhancements we have made to our treasury and payment product offerings.

Non-interest income was up 10% in part due to the 14% growth in investment banking income, where we had record years in equity originations, M&A, syndicated and leveraged finance and investment grade bond originations. The breadth of growth here is reflective of the investments we have made to expand our capabilities and thus become more of a strategic advisor to all of our wholesale clients. The tangible efficiency ratio improved further to 48.6% as we drove further operating leverage while also investing in revenue-generating initiatives.

In conclusion, while market conditions can be choppy quarter-to-quarter, we are encouraged by our differentiated business model within wholesale banking and are confident in the opportunities we have to expand our client base, meet more of their complex corporate finance and advisory needs and continue to grow our business.

Moving to the mortgage segment, revenues were stable sequentially as higher servicing income helped to offset the decline in production income. Net income declined $38 million as a result of the $50 million in after-tax discrete benefits recognized in the third quarter. On a year-over-year basis, revenue declined by $22 million as a result of lower margins both in production and our held-for-investment loan portfolio. These declines were partially offset by an increase in servicing income as a result of portfolio acquisitions over the past couple of years.

For the full year, we saw $137 million increase in adjusted net income, which is primarily due to the significantly improved credit quality of the loan portfolio both as a result of the improving housing market and our proactive actions to de-risk the book. This improvement was partially offset by a decline in net interest income as a result of $2.3 billion of loan sales in 2014 and lower loan spreads in 2015.

Production volume increased by 38% in 2015, due primarily to higher refinancing activity, new purchase volume also improved in 2015, a broader sign of the continued improvement of the economies in our markets. We also grew the servicing portfolio by 5% as a result of portfolio acquisitions. In both production and servicing, we achieved our objectives of smart, targeted market share growth. I would also like to point out that we successfully switched to a new loan origination system in the second half of 2015, which facilitates a faster and simpler loan process for our clients and teammates, but also allowed us to more efficiently meet the new TRID requirements, which became effective October 1. This was a significant and important undertaking and we have already been able to use our success as a competitive advantage to attract new talent in several of our markets. Overall, the mortgage business continues to benefit from improving asset quality and good expense discipline, both of which have allowed this business to become a more steady contributor to the bottom line performance of this company.

And with that, I will turn it back over to Bill to share some concluding perspectives on our performance in 2015 and our outlook for 2016.

Bill Rogers

Great. Thanks Aleem. So coming into last year, we have several key objectives; continue to improve efficiency, further optimize the balance sheet in order to enhance returns, invest in growth opportunities and increase capital return. Overall, I am pleased with our performance in 2015 as we met each of these objectives. We grew earnings per share by a solid 11%, we met our efficiency ratio goal, we increased ROA by 5 basis points and advanced the revenue growth trajectory of many businesses, all in the context of managing the headwinds associated with the prolonged low interest rate environment. We also grew tangible book value per share by 6% and returned over 60% of our earnings back to our shareholders, continuing our path of improving capital returns.

Our performance is a reflection of the diversity of our business model, where each segment made strong contributions to enhance the financial performance of our company. Within consumer and private wealth, organic production growth and higher return portfolios and continued momentum on the deposit front has allowed us to further optimize the balance sheet. Our investments in digital have allowed us to better identify and meet more client needs while also extracting efficiencies from certain areas. In wholesale, our differentiated business model allowed us to absorb the impact of the more challenging market conditions in the second half of the year and drive strong high single-digit growth in revenue and net income. In particular, I am pleased with the more integrated One Team approach we delivered to our clients and that’s evidenced by a 36% increase in capital markets revenue from the commercial real estate and private wealth businesses. This increase in client and product diversity will be an important contributor to the long-term growth of wholesale banking. And within mortgage, we benefited from the abatement of legacy mortgage related costs, but also from the targeted growth initiatives we have in place to grow production in servicing. The transition to a new origination platform was time-consuming and challenging, but I believe we have the right risk and operational foundation to place to further advance our mortgage business.

So as we look into 2016, we will remain focused on the same primary strategies of optimizing our business mix and balance sheet, investing in growth opportunities and improving efficiency, all with the goal of creating further value for our clients and shareholders. While the revenue environment is expected to improve, we expect credit cards will normalize in the non-recurring benefits we had in 2015 will abate. Subsequently, we will need to deliver positive operating leverage in 2016 in order to achieve our financial objectives and make further progress towards our long-term target of a sub-60% efficiency ratio. So to conclude, I would like to take a moment to recognize and thank all of our teammates for their key roles in delivering our 2015 financial results, many of them are on the phone today. Our team is diligently focused on fulfilling our purpose of lighting the way to financial well-being for our clients, communities and shareholders. As we look into 2016, we will further advance this purpose, facilitating a dialogue about money in order to help Americans move from financial stress to control and ultimately to confidence. Our team is absolutely ready to go.

Now with that, I will turn it back over to Ankur and we will begin the Q&A portion.

Ankur Vyas

Dexter, we are now ready to begin the Q&A portion of the call. As we do so, I would like to ask the participants to please limit yourself to one primary question and one follow-up so that we can accommodate as many of you as possible today.

Question-And-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt O’Connor of Deutsche Bank. Your line is now open.

Matt O’Connor

I was wondering if you can give us some thoughts on your framework in terms of when all said and done, how you think the energy book plays out in terms of either default rates or total NPL levels, what the loss content might be and any framework on that kind of would be helpful?

Bill Rogers

Well, Matt, let me take a crack at that. I think when you think about our energy book overall, it’s helpful to think about the context. So you know our energy exposure overall is only 2.2% of our total loan book, first of all. Secondly, within that E&P and oil field services are 40%, so only about 1% of our total loan portfolio is in those two sectors which should probably be the sectors most negatively impacted by lower oil prices. Within that, now you think about, we have got about 4.5% of reserves against the entire energy book. So for those two segments, reserve levels are closer to 12%. So that starts to feel pretty good. And then thirdly, of course we have got total of $1.8 billion of ALLL in total, which is available to cover all of our loans. So as I think about what might happen here in 2016, ‘17, ‘18, we will see some increase in NPLs. We will see some increase in provisioning against our energy portfolio. But in the context of the rest of the book, where our resi mortgage exposure continues to get better and better and as charge-off levels and required reserves continue to come down, I think that our 2016 charge-off levels and provision levels for energy actually are looking very manageable.

Matt O’Connor

And then, just on the loss content, once the loan is moved to non-performer, can you remind us, do you take a charge-off on that and then what’s potentially the eventual loss content, obviously not all non-performers are the same, but it takes a while for that to be clear, I think from the outside?

Bill Rogers

It does. I mean, it will take a while to see how all of this plays out. We build – we are building up our reserves for energy clients, up client-by-client. You actually made a great point in not all non-performers have the same loss content. You saw the increase in non-performing loans that we had this quarter. I ought to let you know that the vast majority of those non-performing loans are actually performing, they are still performing today. What we are trying to do here is be prudent and get ahead of the curve on non-performing loans the same way you saw us do in Q4 ‘14 when we tried to get ahead of the curve and start to provision early for energy. We are trying to do the same thing here in non-performing loans.

Matt O’Connor

Okay. Thank you.

Operator

Thank you very much. Our next question comes from the line of John McDonald of Bernstein. Your line is now open.

John McDonald

Yes. Hi, just following-up on credit again, the outlook for net charge-offs less than 40 basis points is a bit away from the 24 basis points you did this quarter, recognizing that’s a very low charge-off rate that you are at today, are you expecting it to kind of march up steadily? And is it the driver of your outlook for higher charge-offs really just energy or you have got some other normalization going on?

Bill Rogers

No, it’s mostly just energy as sort of where I think the inflection is, John. We have been seeing now for several years that our charge-off levels are unsustainably low. Well, it looks like energy might be the catalyst to actually turn that around. So, I do expect that we will see more provisioning coming in the wholesale book in 2016, but I also expect the rise in provisioning will be mitigated by the releases that I expect to get out of our consumer and mortgage books in that as a result of resi mortgage improving.

Aleem Gillani

Yes. And outside of energy that increase was more of a macro combat. I mean to your question, we don’t see any particular portfolio segment, geography however you might want to categorize it that we see a particular problem and it’s more of a macro kind of non-energy compound.

John McDonald

Okay. So, you still could have some net reserve release in the beginning part of the year, Aleem. It sounds like the gap is going to close between provision and charge-offs, but you could still have a little bit of a gap?

Bill Rogers

Maybe, I am not sure yet, John. But if I think about the full year, I would think that our full year provision and charge-offs ought to be pretty close.

John McDonald

Okay, thank you.

Operator

Thank you very much. Our next question comes from the line of Betsy Graseck of Morgan Stanley. Your line is now open.

Betsy Graseck

Hi, thanks. Two questions. Just one more on the energy reserve and one on loan growth, on the energy reserve, you indicated the 4.5% and the 12%. Can you give us a sense as to how you think about oil price when you are making that reserve? Is that done on a forward basis, on a spot basis? And can you give us some sensitivities to, if oil goes down another $5 or another $10, what happens to the reserve there?

Bill Rogers

Well, the reserve is built as of December 31, Betsy. So at the time we used the oil price on that day, which was $37. That’s the way the reserve was built. If oil stays down under $30 for a while, yes, we will expect that we will continue to see additional provisioning required. But as I said earlier, I think we will be able to mitigate some of that with the benefits we get out of the mortgage book overall. Our price decks as you know are pretty sort of consistent across the industry and we will be rebuilding our new price deck for the spring re-determination period very soon.

Betsy Graseck

Okay, no sense of just what kind of order of magnitude change we should expect or like should I just take whatever the reserve is that you have done today than have another half or given an expectation for if oil stays at $30?

Bill Rogers

I don’t have a great sense of that for you yet, but it will be well into eight figures, maybe even get into nine figures in total provisioning over a multiyear period, which in the context of the total PPNR for the company and releases will be coming out of mortgage, I think they are very manageable.

Betsy Graseck

Okay. And just the follow-up was on loan growth and C&I had a nice inflection this quarter, maybe you can speak to the drivers there, was that just less asset sales or more of originations, context would be great?

Bill Rogers

Yes, it’s interesting, because we have sort of talked about loan growth being an outcome versus something that we are managing. And if I look at production over the last few quarters, it’s actually been very consistent and at a consistent high level. In the fourth quarter, in particular, we benefit a little more from some lower pay-downs, so pay-downs were a little less in the fourth quarter than the third quarter. We had a slight increase in the utilization rate. I don’t want to mark anything there, but there was a slight increase in the utilization rate. So, it really is just a – it’s a reflection of all the things we have been doing within the case of the fourth quarter, just a little less headwind than we have had in the previous quarters.

Betsy Graseck

Okay, thanks.

Operator

Thank you very much. Our next question comes from the line of Ken Usdin of Jefferies. Your line is now open.

Ken Usdin

Hi, good morning guys.

Bill Rogers

Good morning, Ken.

Ken Usdin

Good morning. I just want to level set on the starting points for the expense side, I got your point about the step up the annuals, the quarterly step up and then the marketing in the first half and taking your points about driving to operating leverage. It seems like we had a great end to the year and we have that normal step-up. So – and I know we ask this question a lot, but can you just help us frame kind of the starting point and then I presume we kind of still have that ramp down throughout the year. Is that the right way to think about it?

Bill Rogers

Well, that would be a nice way to think about it, but of course, it depends on the revenue environment. If the revenue environment improves in ‘16 relative to ‘15 as we are currently anticipating, I think that will be the driver of expenses increasing ‘16 relative to ‘15. If I try to think about, Ken, an average number and of course, it’s going – this is going to be volatile quarter-to-quarter. But if I try to think about an average number for the year, I would probably be thinking about something that would be closer to something like $1.35 billion on average, some quarters higher, some quarters lower and improving slightly, improving efficiency ratio as that revenue appears. If the revenue environment does not improve, then we will have to adjust expenses accordingly. And in that case, I would start thinking about a number lower than that, maybe closer to the $1.3 billion.

Ken Usdin

Yes, understood. And then just a follow-up on that is you guys have done a great job over the past couple of years rightsizing shrinking branch count, etcetera, how much flexibility would you have in that tougher environment? We don’t want to anticipate happening, but like is there a lot of opportunity set still inside if that were to be the case?

Bill Rogers

Well, this is Bill. I mean, I think the opportunity still exist, because we are still on the path to sub-60. So, we have plans underway for expense management in virtually every category. So, it’s not like they are not on the shelf already, our ability to execute against them would really mean. In fact, we are taking a little more risk speeding them up in terms of terms [ph]. So, we have those plans in mind.

Aleem Gillani

Ken, you may have seen the press announcement we had in the last few days about changes in our real estate footprint in Raleigh and in Richmond, we are moving to new space. We will take our total number of locations in those two cities from 11 to 5 between ‘16 and ‘17. We will reduce our square footage in those areas by 50% and we will create a better environment for our teammates. Just as a sort of a point of info, we have been – you said, we have been working on branch count and office space reduction over the last several years. We have actually taken out 2.5 million square feet over the last 4 years out of our physical footprint and we continue to be on that path. Between now and 2018, we will stay on that becoming more efficient with our use of space.

Bill Rogers

So to answer your question, I mean, we think we have got the flexibility on the expense versus revenue achieved in the efficiency ratio target long-term. It doesn’t exactly work perfectly quarter-to-quarter. I mean, that’s the point that I would want to make. But we can look ahead and adjust the levers accordingly.

Ken Usdin

Understood. Thanks for the color.

Operator

Thank you. Our next question comes from the line of Ryan Nash of Goldman Sachs. Your line is now open.

Ryan Nash

Hey, good morning guys.

Bill Rogers

Good morning, Ryan.

Ryan Nash

Maybe I could just follow-up on Ken’s question, if we were to have expenses coming in at $1.35 billion you are going to imply something like mid single-digit growth. And Aleem, given your comments around positive operating leverage, that implies revenue growth should be north of 5%. I was just wondering maybe can you talk us through the components of revenue growth? How should we think about NII growth? What does it mean for the net interest margin over the last couple of quarters? And on the fee side, how do we think about the split between wholesale and consumer fees? Clearly, consumer will likely be under pressure as you make some changes. Markets have come down. So, may be that will hurt the wealth business, but just trying to contextualize how to think about the different moving pieces on revenue growth?

Bill Rogers

Thanks Ryan for the question. So, if you think about NII overall, for the last several years, it’s been essentially flat, maybe even coming down a small amount and that’s been the effect of declining NIMs essentially being offset by production and growth. Now that NIMs are no longer declining and we are looking for NIM to be essentially stable for 2016, that underlines our organic loan production and growth on both assets and liabilities is going to start to show through. And as that shows through, I think we will see NII start to climb in ’16, sort of as it started to do in ‘15 after the first quarter. So I think that will be where you see the growth in revenue. On the fee income side, you are right, we are not really expecting growth in consumer service charges, that’s not going to be a growth area for us, but the growth that we have seen overall in wholesale will continue, I think will continue to appear. The One Team approach that we have got, our ability to meet more of our clients’ needs across more products and be a bigger, more of a strategic advisor to more clients, I think continues to show up. So I think that will be helpful. And I think mortgage will also become a more sort of consistent contributor to the bottom line. So that’s where revenue will appear.

Ryan Nash

Got it. And then maybe if I could just follow-up on one other question, given where your reserve is on energy and the E&P and oil field services book of 12% and which I think is well above a lot of your peers, I guess how should we think about the comment that you made that we should expect continued reserve builds from here. And more specifically, if oil prices stayed at these levels, what would be realistic loss content over a 2-year period, I heard what you said to Betsy, but I am just trying to understand like why would losses in your book be at that type of level relative to peers you were talking about levels that are half of what you are commenting on?

Bill Rogers

Well, you know us, we are inherently a conservative company and we would try to think conservatively. So I don’t know where peers are or what they have got in their book. We are trying to be careful and make sure that we stay ahead of this overall. I think our reserve levels are very prudent for where we are right now with oil at this stage in the cycle. But remember, we set these reserves when oil was $37. And if oil moves into the $20s, we will have to take account of that and I would think that the farther oil moves down, the loss content starts to become asymmetric for the industry.

Ryan Nash

Got it. Thanks for taking my questions.

Bill Rogers

Thanks.

Operator

Thank you very much. Our next question comes from the line of Mike Mayo of CLSA. Your line is now open.

Mike Mayo

Hi. Well, can’t wait for the Super Bowl to see your ad.

Bill Rogers

Great.

Mike Mayo

But it comes in the context of 4 years of expense declines and now expense is going higher as you just discussed. So it’s the same question I asked last year and you got your target. But if we don’t get rate increases, do you think you can still grow revenues faster than expenses and you gave some specific examples about those locations. But if you could say, what are the few main reasons why you think you can improve efficiency if that is the case without rate hikes?

Bill Rogers

Yes. I think Mike, as we went into last year we were a very clear about saying we were going to improve efficiency irrespective of rates. So we sort of said take that off the table. Now it looks like we are only projecting two rate hikes and one at end of the year. So I think we are still taking a pretty conservative approach to the impact of rate hikes. And we are continuing to make the statement that we are going to stay focused on improving our efficiency ratio. Now in fairness, it grinds down slower. So there is no doubt about that. I mean we got sort of a big junk and it grinds down slower. But we are not backing off, we are not wavering or anything I guess the commitment to continue to improve on the efficiency side.

Aleem Gillani

Mike, in terms of some of the things that we continued to work on expenses, to be clear, we are not saying that we are taking our foot off the gas pedal on managing expenses. And we are still looking at overall operations costs. We are looking at call centers, lending centers. We are still looking at technology infrastructure and how we can continue to improve our efficiency there. I mentioned that we introduced a new mortgage origination platform late in 2015 and I anticipate that, that will help our overall efficiency and effectiveness within the mortgage segment. I mentioned we continue to work on optimizing our real estate footprint and we will continue to do that now through ‘18 and ‘19, I expect. And look, across the whole company, we are staying disciplined on how we manage roles, responsibilities. We have a very clear pay for performance philosophy. I think that shows up for – across our teammate profile. And of course we continue to consolidate our suppliers. So we are working on managing our third party supplier profile. So none of this is meant to say that, hey we are declaring victory on expenses, what we are saying is that as we move forward the big rocks on expenses, I think we have achieved and we are going to be more balanced to going forward in terms of revenue growth and expense management.

Mike Mayo

Okay. Thank you.

Operator

Thank you very much. Our next question comes from the line of Marty Mosby of Vining Sparks. Your line is now open.

Marty Mosby

Thanks. Aleem, I want to ask you on your guidance on net interest margin being I think a little inconsistent, so I just want to make sure we connect the dots right, you came into the year in first quarter of ‘15, you had a 2.83 margin, which improved to 2.98 by the time you get to the end of the year, which would average 2.90, you are saying you are going to improve 3 basis points to 5 basis points in the first quarter. And so when you are looking at that kind of trend, your net interest margin would have to significantly be above in 2016 versus 2015 unless expense going downward from the first quarter through the end of 2016?

Aleem Gillani

That’s right Marty, that’s exactly what I was trying to say. I am sorry, if I was unclear. I do expect...

Marty Mosby

Just a little more flat year-to-year, which you really got a – already a lot of improvement in there and I was also wondering about you said if you had another rate hike in the middle of the year, if you wouldn’t see the margin improve over the first quarter, when you are already getting some benefit from rising interest rates, there would be seems like another catalyst or margins to go up again on that next, just one more rate hike in the middle of the year?

Aleem Gillani

I do think that will help. So to be clear on my margin expectations, Marty I think the first quarter margin will go up from the fourth quarter. And I think that’s sort of 3 basis points to 5 basis points or so. And then from there for the rest of the year, I am expecting it to be generally stable to the first quarter number, to the increased higher margin level, assuming we get that one rate hike in the middle of the year. The offset to that, so that’s – the rate hike is going to be helpful and we are asset sensitive. And we are asset sensitive actually at every key rate duration point across the curve. So that will be helpful. The offset to that is competitive pressures are still strong. Spreads continue to be tight, if anything grinding maybe at a bit tighter, but sort of trying to stabilizing a little bit relative to the decline we saw in spreads over the last year. And we still have old mortgages and old securities that will continue to roll off the books that will have to reinvest that new lower rates. So there are mitigants to the rate rise, which I think will put a cap on margin. But I do think year-over-year, margin will be higher and Q1 to Q4 margin will be higher.

Marty Mosby

And then as a follow-up on the asset quality side, you are talking about being conservative in a sense that you got performing loans that somehow you are pushing into non-performing, I didn’t really have any foreshadowing of this in the delinquencies, can you give us some feel for the migration of how $200 million ended up in non-performing this particular quarter and your thought process around that deterioration? Thank you.

Bill Rogers

Yes. Thanks for the question, Marty. We are just trying to be a little bit careful here. The majority of the loans we put into non-performing are actually still performing today. They are performing loans, but these are loans when we look at those particular clients, we think that there is a risk that they will become non-performing some time in the next couple of years if oil stays where it is. Remember how quickly this move has been on oil, right. And so it’s only 15 months ago, we were at $100 a barrel. So, the move has been very, very rapid and we are just trying to make sure that we try and stay ahead of this, so that we don’t end up surprising you and ourselves later.

Marty Mosby

Thanks.

Ankur Vyas

Dexter, we have time for one more question.

Operator

Thank you very much. Our last question comes from John Pancari of Evercore ISI. Your line is now open.

John Pancari

Good morning.

Bill Rogers

Good morning, John.

John Pancari

Going back to energy, sorry, the – regarding the increase in the NPAs, can you just tell us what types of credits they were or the E&P or service that went on to NPA? Also were they shared national credits and do you have the average size of the credits that moved on or the number?

Aleem Gillani

Yes, it was just a handful of credits, John. I don’t know if they were shared national credits, but it was a relatively small number and they were all either upstream or services.

John Pancari

Okay. And again, the increase in the charge-offs this quarter that was related to the energy book as well?

Bill Rogers

Yes, some of it was. There was one charge-off in energy that related to one credit.

John Pancari

Okay. And then the non-energy or the non-oilfield service and non-E&P types of loans that you are including in that energy-related classification, what is that? Is that utilities and coal?

Bill Rogers

That’s mostly midstream and downstream. So, when you look at midstream and downstream that makes up the remainder of what we call the energy book. And when you think about what lower oil prices do for midstream, it’s sort of a nonevent and for downstream, it’s actually beneficial. And so for our downstream clients, the decrease in energy prices will help them.

John Pancari

Okay, alright. And then lastly also within the energy topic, do you have your total criticized ratio within your energy portfolio? And then also how much of your energy book is investment grade versus non-investment grade?

Bill Rogers

Well, John, let me answer those backwards. The investment grade versus non-investment grade, I don’t have that exact number in front of me, but as you would expect, we have a relatively higher proportion than others of investment grade, so think about the context maybe of a third to a half of our book would actually be investment grade. And as you would also expect when you think about a conservative underwriter like SunTrust, the criticized portion would be relatively low and for us that’s on the order of 20%.

John Pancari

Okay. And then lastly, the first lien versus second lien, do you have that?

Bill Rogers

The vast majority of our loans are first lien. The vast, vast majority of our loans are first lien.

John Pancari

Okay. Alright, great. Thank you.

Ankur Vyas

Operator, this concludes our call. Thank you to everyone for joining us today. If you have any further questions, please feel free to contact us in the Investor Relations department.

Operator

And that concludes today’s conference. Thank you all for participating. You may now disconnect.

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