SunTrust Reports Fourth Quarter and Full Year 2016 Results

ATLANTA, Jan. 20, 2017 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) reported net income available to common shareholders of $448 million, or $0.90 per average common diluted share.  This compares to $0.91 for the prior quarter and $0.91 for the fourth quarter of 2015.  For the full year, earnings per share increased 1% from $3.58 in 2015 to $3.60 in 2016 driven by strong revenue growth and higher capital returns, partially offset by a higher provision expense and higher noninterest expense.

"Our performance this quarter marked a solid conclusion to a strong year for SunTrust," said William H. Rogers, Jr., chairman and CEO of SunTrust Banks, Inc.  "2016 was the fifth consecutive year in which we grew earnings per share, improved efficiency, and increased capital return, demonstrating our consistent ability to deliver on the commitments we've made to our shareholders.  I am confident that 2017 will be another year in which we continue our positive financial performance trajectory and improve financial confidence for our clients and communities."

Fourth Quarter 2016 Financial Highlights

(Commentary is on a fully taxable-equivalent basis unless otherwise noted. Consistent with SEC guidance in Industry Guide 3 that contemplates the calculation of tax-exempt income on a tax equivalent basis, net interest income, net interest margin, total revenue, and efficiency ratios are provided on a fully taxable-equivalent basis, which generally assumes a 35% marginal federal tax rate.  We provide unadjusted amounts in the table on page 3 of this news release and detailed reconciliations and additional information in Appendix A on pages 12 and 13.)

Income Statement

• Net income available to common shareholders was $448 million, or $0.90 per average common diluted share, compared to $0.91 for the prior quarter and $0.91 for the fourth quarter of 2015.
• Total revenue decreased 2% compared to the prior quarter and increased 7% compared to the fourth quarter of 2015.
  • The sequential decline was driven by lower noninterest income (primarily mortgage-related), which was partially offset by higher net interest income.
  • Compared to the fourth quarter of 2015, revenue growth was driven by increases in both net interest income and noninterest income.
• Net interest margin was 3.00% in the current quarter, up 4 basis points sequentially and up 2 basis points compared to the prior year quarter driven by higher earning asset yields and continued positive mix shift in the loan portfolio.
• Provision for credit losses increased $4 million sequentially and $50 million compared to the fourth quarter of 2015 due to higher net charge-offs.
• Noninterest expense declined 1% sequentially and increased 8% compared to the prior year quarter. 
  • The sequential decrease was driven by reductions across most expense categories, partially offset by higher legal and consulting fees tied to business improvement initiatives and higher marketing and customer development costs. 
  • Compared to the prior year quarter, the increase was driven by ongoing, strategic investments, higher compensation associated with improved business performance, investments in technology, and higher regulatory and compliance costs.
• The efficiency and tangible efficiency ratios in the current quarter were 63.7% and 63.1%, respectively, and were 62.6% and 62.0%, respectively, on a full year basis.
  • The full year efficiency and tangible efficiency ratios improved by 58 and 65 basis points, respectively, compared to 2015, driven by positive operating leverage.

Balance Sheet

• Average loan balances increased $321 million sequentially, driven by growth in consumer loans, and 5% compared to the fourth quarter of 2015, due to broad-based growth across most asset classes.
  • Average sequential loan growth was impacted by a $1 billion auto loan sale in the latter part of the prior quarter.  Period-end loan balances increased $1.8 billion, or 1%.
• Average consumer and commercial deposits increased 2% sequentially and 7% compared to the fourth quarter of 2015, driven by continued success in deepening client relationships.

Capital

• Estimated capital ratios continue to be well above regulatory requirements.  The Common Equity Tier 1 ("CET1") ratio was estimated to be 9.6% as of December 31, 2016, and 9.5% on a fully phased-in basis.
• During the quarter, the Company repurchased $240 million of its outstanding common stock in accordance with its 2016 capital plan.
• Book value per common share was $45.38 and tangible book value per common share was $32.95, down 3% and 4%, respectively, from September 30, 2016, given the decline in accumulated other comprehensive income (AOCI) due to the increase in long-term rates.

Asset Quality

• Nonperforming loans decreased $104 million from the prior quarter and represented 0.59% of total loans at December 31, 2016.
• Net charge-offs for the current quarter were $136 million, or 0.38% of average loans on an annualized basis, up $10 million compared to the prior quarter. 
• The provision for credit losses increased $4 million sequentially due primarily to higher net charge-offs and increased loan growth, largely offset by a lower energy-related provision expense.
• At December 31, 2016, the ALLL to period-end loans ratio declined 4 basis points from the prior quarter driven by the resolution of problem energy credits.

Consolidated Financial Performance Details
(Commentary is on a fully taxable-equivalent basis unless otherwise noted)

Revenue

Total revenue was $2.2 billion for the current quarter, a decrease of $39 million compared to the prior quarter.  Net interest income increased $35 million sequentially due to a higher net interest margin and growth in average earning assets.  These increases were offset by a $74 million decline in noninterest income driven by lower mortgage-related income, partially offset by an increase in other noninterest income.  Compared to the fourth quarter of 2015, total revenue increased $146 million, driven by a $96 million increase in net interest income and a $50 million increase in noninterest income due primarily to growth in capital markets, mortgage production, and other noninterest income.

For 2016, total revenue was $8.7 billion, an increase of $568 million, or 7%, compared to 2015. The increase was driven by higher net interest income, as well as strong growth in mortgage and capital markets-related income, partially offset by lower wealth management-related income and lower securities gains.

Net Interest Income

Net interest income was $1.4 billion for the current quarter, an increase of $35 million and $96 million compared to the prior quarter and prior year quarter, respectively.  Both increases were driven by improvements in the net interest margin and growth in average earning assets.

Net interest margin for the current quarter was 3.00%, compared to 2.96% in the prior quarter and 2.98% in the fourth quarter of 2015.  The 4 basis point sequential increase and 2 basis point year-over-year increase were driven by higher earning asset yields (as a result of the increase in benchmark interest rates and continued positive mix shift in the portfolio), partially offset by higher funding costs. 

For 2016, net interest income was $5.4 billion, a $453 million, or 9%, increase compared to 2015.  The net interest margin was 3.00% for 2016, a 9 basis point increase compared to 2015.  The increases in both net interest income and net interest margin were driven by the same factors that impacted the sequential and year-over-year comparisons discussed above.

Noninterest Income

Noninterest income was $815 million for the current quarter, compared to $889 million for the prior quarter and $765 million for the fourth quarter of 2015.  The $74 million sequential decrease was due to declines in mortgage and capital markets-related income, as well as client transaction and wealth management-related revenues, partially offset by an increase in other noninterest income.  Compared to the fourth quarter of 2015, noninterest income increased $50 million, driven by higher capital markets and mortgage production-related income, partially offset by declines in mortgage servicing and wealth management-related income. 

For 2016, noninterest income was $3.4 billion, an increase of $115 million, or 4%, compared to 2015 due primarily to higher mortgage and capital markets-related income, partially offset by a decline in wealth management-related income.

Investment banking income was $122 million for the current quarter, compared to $147 million in the prior quarter and $104 million in the fourth quarter of 2015.  The $25 million sequential decrease was due to declines in activity across most product categories following the record performance in the prior quarter.  Compared to the fourth quarter of 2015, the increase was driven by strong deal flow activity in syndicated finance.  For 2016, investment banking income increased 7%, which marks the ninth consecutive year of record performance.

Trading income was $58 million for the current quarter, compared to $65 million in the prior quarter and $42 million in the fourth quarter of 2015.  The sequential decrease was driven by mark-to-market losses on fixed income inventory in relation to the increase in interest rates.  The increase compared to the fourth quarter of 2015 was driven primarily by lower counterparty credit valuation reserves in connection with higher interest rates.

Mortgage production income for the current quarter was $78 million, compared to $118 million for the prior quarter and $53 million for the fourth quarter of 2015.  The $40 million decrease from the prior quarter was due primarily to lower refinancing activity and lower gain-on-sale margins.  The $25 million increase compared to the fourth quarter of 2015 was primarily due to higher purchase and refinancing activity.  For the full year, mortgage production income increased $96 million, or 36%, as a result of increased purchase and refinancing activity and continued market share gains.

Mortgage servicing income was $25 million for the current quarter, compared to $49 million in the prior quarter and $56 million in the fourth quarter of 2015.  The $24 million sequential decrease and $31 million year-over-year decrease were driven primarily by lower net hedge performance and higher servicing asset decay expense.  On a full year basis, servicing income increased $20 million relative to 2015 as a result of 8% growth in the servicing portfolio and better net hedge performance. At December 31, 2016 and 2015, the servicing portfolio was $160.2 billion and $148.2 billion, respectively.

Trust and investment management income was $73 million for the current quarter, compared to $80 million for the prior quarter and $79 million for the fourth quarter of 2015.  The $7 million decrease from the prior quarter was primarily related to seasonally higher tax-related trust fees earned in the prior quarter.  The $6 million decrease compared to the prior year quarter was primarily due to a decline in trust and institutional assets under management.

Client transaction-related fees (namely service charges on deposits, other charges and fees, and card fees) decreased $10 million compared to the prior quarter due to the impact of the enhanced posting order process instituted during the fourth quarter and lower client-related transactional activity.  Compared to fourth quarter of 2015, client transaction-related fees were stable.

Retail investment income was $69 million for the current quarter, compared to $71 million in both the prior quarter and the fourth quarter of 2015.  The $2 million decline compared to the prior quarter and prior year quarter was a result of reduced transactional activity, partially offset by an increase in retail brokerage managed assets.

Other noninterest income was $62 million for the current quarter, compared to $21 million in the prior quarter and $30 million in the fourth quarter of 2015.  The $41 million increase compared to the prior quarter and $32 million increase compared to the prior year quarter was due primarily to higher client transaction activity within certain Wholesale Banking businesses (Structured Real Estate and SunTrust Community Capital) in the fourth quarter as well as certain asset impairments recognized in the third quarter.

Noninterest Expense

Noninterest expense was $1.4 billion in the current quarter, representing a sequential decline of $12 million and an increase of $109 million compared to the fourth quarter of 2015.  The sequential decrease was driven by reductions across most expense categories, partially offset by higher legal and consulting fees and higher marketing and customer development costs.  The increase relative to the prior year quarter was driven by increases across most expense categories, partially offset by lower outside processing and software expenses. 

For 2016, noninterest expense was $5.5 billion compared to $5.2 billion for 2015.  The $308 million, or 6%, increase was related to ongoing, strategic investments, higher compensation associated with improved business performance, investments in technology, and higher regulatory and compliance costs.

Employee compensation and benefits expense was $762 million in the current quarter, compared to $773 million in the prior quarter and $690 million in the fourth quarter of 2015.  The sequential decrease of $11 million was due to lower employee benefits costs, largely offset by increased incentive compensation expense tied to the performance of the Company's stock price (which increased 25% during the quarter).  The $72 million increase compared to the fourth quarter of 2015 was due primarily to higher compensation costs associated with improved business performance, ongoing investments in talent, and increased incentive compensation expense tied to the Company's stock price (which increased 28% compared to the prior year).

Operating losses were $23 million in the current quarter, compared to $35 million in the prior quarter and $22 million in the fourth quarter of 2015.  The sequential decrease of $12 million was due primarily to higher regulatory, compliance, and legal charges recognized during the prior quarter.

Outside processing and software expense was $209 million in the current quarter, compared to $225 million in the prior quarter and $222 million in the fourth quarter of 2015.  The decrease relative to the prior quarter and prior year was primarily due to a benefit recognized during the current quarter resulting from a contract renegotiation with a key vendor.

FDIC premium and regulatory expense was $46 million in the current quarter, compared to $47 million in the prior quarter and $35 million in the fourth quarter of 2015.  The increase compared to the prior year quarter was driven by the FDIC surcharge on large banks, which became effective during the third quarter of 2016, and a larger assessment base attributable to balance sheet growth. 

Marketing and customer development expense was $52 million in the current quarter, compared to $38 million in the prior quarter and $48 million in the fourth quarter of 2015.  The increase relative to both quarters was driven by higher advertising and client development costs.

Net occupancy expense was $94 million in the current quarter, compared to $93 million in the prior quarter and $86 million in the fourth quarter of 2015.  The increase relative to the prior year quarter was primarily due to a reduction in amortized gains from prior sale leaseback transactions.

Other noninterest expense was $154 million in the current quarter, compared to $140 million in the prior quarter and $127 million in the fourth quarter of 2015.  The $14 million sequential and $27 million year-over-year increase was driven primarily by higher legal and consulting fees in response to regulatory and compliance initiatives and higher credit-related expenses recognized in the current quarter.

Income Taxes

For the current quarter, the Company recorded an income tax provision of $193 million, compared to $215 million for the prior quarter and $185 million for the fourth quarter of 2015.  The effective tax rate for the current quarter was 29%, compared to 31% in the prior quarter and 28% in the fourth quarter of 2015.

Balance Sheet

At December 31, 2016, the Company had total assets of $204.9 billion and total shareholders' equity of $23.6 billion, representing 12% of total assets.  Book value per common share was $45.38 and tangible book value per common share was $32.95, down 3% and 4%, respectively, from September 30, 2016, driven by a decline in accumulated other comprehensive income due to the increase in long-term rates.  Compared to December 31, 2015, book value per common share and tangible book value per common share increased 4% and 5%, respectively, as a result of growth in retained earnings.

Loans

Average performing loans were $141.7 billion for the current quarter, a slight increase over the prior quarter and a 5% increase over the fourth quarter of 2015.  The sequential growth was driven by consumer other direct, guaranteed student, and C&I.  This growth was partially offset by declines in average consumer indirect loans (in connection with the $1 billion auto loan sale executed in the prior quarter) and home equity products.  The increase in average performing loans compared to the fourth quarter of 2015 was due to broad-based growth across most loan classes.

Deposits

Average consumer and commercial deposits for the current quarter were $158.0 billion, a 2% increase over the prior quarter and 7% increase over the fourth quarter of 2015.  The sequential growth was due to a 4% increase in NOW account balances and a 3% increase in demand deposits.  The growth compared to the fourth quarter of 2015 was driven primarily by increases in NOW, demand deposits, and money market accounts, partially offset by a slight decline in time deposits.

Capital and Liquidity

The Company's estimated capital ratios were well above current regulatory requirements with the Common Equity Tier 1 ratio estimated to be 9.6% at December 31, 2016, and 9.5% on a fully phased-in basis.  The ratios of average total equity to average total assets and tangible common equity to tangible assets were 11.84% and 8.15%, respectively, at December 31, 2016.  The Company continues to have substantial available liquidity in the form of cash, high-quality government-backed or government-sponsored securities, and other available contingency funding sources.

Per its 2016 capital plan, the Company declared a common stock dividend of $0.26 per common share and repurchased $240 million of its outstanding common stock in the fourth quarter.  The Company currently expects to repurchase approximately $480 million of additional common stock during the first half of 2017 in accordance with its 2016 capital plan.

Asset Quality

Total nonperforming assets were $919 million at December 31, 2016, down $100 million compared to the prior quarter and up $184 million compared to the fourth quarter of 2015.  The decrease compared to the prior quarter was driven by the continued resolution of problem energy credits.  Compared to the prior year, the increase was driven by increases in energy-related loans and home equity products, the latter of which was in response to changes in the Company's home equity line workout program during the first quarter of 2016.  The ratio of nonperforming loans to total loans was 0.59%, 0.67%, and 0.49% at December 31, 2016, September 30, 2016, and December 31, 2015, respectively.

Net charge-offs were $136 million during the current quarter, an increase of $10 million and $53 million compared to the prior quarter and the fourth quarter of 2015, respectively.  The increase compared to the prior quarter and prior year quarter was driven by energy, commercial real estate, and indirect auto.  The current quarter included $40 million of energy-related net charge-offs compared to $33 million recognized in the prior quarter.  The ratio of annualized net charge-offs to total average loans was 0.38% during the current quarter, compared to 0.35% during the prior quarter and 0.24% during the fourth quarter of 2015.  The provision for credit losses was $101 million in the current quarter, an increase of $4 million and $50 million compared to the prior quarter and the fourth quarter of 2015, respectively.  The increase in the provision for credit losses compared to the fourth quarter of 2015 was due primarily to higher net charge-offs.

At December 31, 2016, the allowance for loan and lease losses was $1.7 billion, which represented 1.19% of total loans, a decrease of $34 million, or 4 basis points, relative to September 30, 2016.  This decrease was due primarily to the resolution of problem energy credits.

Early stage delinquencies increased 8 basis points from the prior quarter to 0.72% at December 31, 2016.  Excluding government-guaranteed loans, early stage delinquencies were 0.27%, up 2 basis points from the prior quarter and down 3 basis points compared to a year ago.

Accruing restructured loans totaled $2.5 billion and nonaccruing restructured loans totaled $306 million at December 31, 2016, of which $2.6 billion were residential loans, $168 million were consumer loans, and $115 million were commercial loans.  Nonaccruing restructured loans increased $130 million relative to December 31, 2015, largely driven by the classification of certain modified home equity products to nonaccrual status in order to coincide with changes to our home equity line risk mitigation program implemented during the first quarter of 2016.  At December 31, 2016, the majority of the nonaccruing restructured home equity loans modified in 2016 were current with respect to payments and are expected to return to accruing status after the borrowers have demonstrated six months of consistent payment history.

OTHER INFORMATION

About SunTrust Banks, Inc.

SunTrust Banks, Inc. is a purpose-driven company dedicated to Lighting the Way to Financial Well-Being for the people, businesses, and communities it serves. Headquartered in Atlanta, the Company has three business segments: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking. Its flagship subsidiary, SunTrust Bank, operates an extensive branch and ATM network throughout the high-growth Southeast and Mid-Atlantic states, along with 24-hour digital access. Certain business lines serve consumer, commercial, corporate, and institutional clients nationally. As of December 31, 2016, SunTrust had total assets of $205 billion and total deposits of $160 billion. The Company provides deposit, credit, trust, investment, mortgage, asset management, securities brokerage, and capital market services. SunTrust leads onUp, a national movement inspiring Americans to build financial confidence. Join the movement at onUp.com.

Business Segment Results

The Company has included its business segment financial tables as part of this release. All revenue in the business segment tables is reported on a fully taxable-equivalent basis. For the business segments, results include net interest income, which is computed using matched-maturity funds transfer pricing. Further, provision for credit losses represents net charge-offs by segment combined with an allocation to the segments of the provision attributable to quarterly changes in the allowance for loan and lease losses and unfunded commitment reserve balances. SunTrust also reports results for Corporate Other, which includes the Treasury department as well as the residual expense associated with operational and support expense allocations. The Corporate Other segment also includes differences created between internal management accounting practices and U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and certain matched-maturity funds transfer pricing credits and charges. A detailed discussion of the business segment results will be included in the Company's forthcoming Form 10-K.

Corresponding Financial Tables and Information

Investors are encouraged to review the foregoing summary and discussion of SunTrust's earnings and financial condition in conjunction with the detailed financial tables and information which SunTrust has also published today and SunTrust's forthcoming Form 10-K. Detailed financial tables and other information are also available at investors.suntrust.com.  This information is also included in a current report on Form 8-K furnished with the SEC today.

Conference Call

SunTrust management will host a conference call on January 20, 2017, at 8:00 a.m. (Eastern Time) to discuss the earnings results and business trends. Individuals may call in beginning at 7:45 a.m. (Eastern Time) by dialing 1-888-972-7805 (Passcode: 4Q16). Individuals calling from outside the United States should dial 1-517-308-9091 (Passcode: 4Q16).  A replay of the call will be available approximately one hour after the call ends on January 20, 2017, and will remain available until February 20, 2017, by dialing 1-800-925-4236 (domestic) or 1-203-369-3523 (international).  Alternatively, individuals may listen to the live webcast of the presentation by visiting the SunTrust investor relations website at investors.suntrust.com.  Beginning the afternoon of January 20, 2017, listeners may access an archived version of the webcast in the "Events & Presentations" section of the investor relations website. This webcast will be archived and available for one year.

Non-GAAP Financial Measures

This news release includes non-GAAP financial measures to describe SunTrust's performance. The reconciliations of those measures to GAAP measures are provided within or in the appendix to this news release beginning at page 23.

In this news release, consistent with Securities and Exchange Commission Industry Guide 3, the Company presents total revenue, net interest income, net interest margin, and efficiency ratios on a fully taxable equivalent ("FTE") basis, and ratios on an annualized basis. The FTE basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 35% and state income taxes where applicable to increase tax-exempt interest income to a taxable-equivalent basis. The Company believes this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. Total revenue-FTE equals net interest income-FTE plus noninterest income.

The Company presents the following additional non-GAAP measures because many investors find them useful.  Specifically:

• The Company presents the allowance for loan and lease losses excluding government-guaranteed loans and fair value loans, and early-stage delinquencies excluding government-guaranteed loans and fair value loans. The Company believes that the exclusion of loans that are held at fair value with no related allowance, and loans guaranteed by a government agency that do not have an associated allowance recorded due to nominal risk of principal loss, better depicts the allowance relative to loans the allowance is intended to cover.
• The Company presents certain capital information on a tangible basis, including tangible equity, tangible common equity, the ratio of tangible equity to tangible assets, the ratio of tangible common equity to tangible assets, tangible book value per share, and the return on tangible common shareholders' equity, which removes the after-tax impact of purchase accounting intangible assets from shareholders' equity and removes related intangible asset amortization from net income available to common shareholders. The Company believes these measures are useful to investors because, by removing the amount of intangible assets that result from merger and acquisition activity and amortization expense (the level of which may vary from company to company), it allows investors to more easily compare the Company's capital position and return on average tangible common shareholders' equity to other companies in the industry who present similar measures. The Company also believes that removing these items provides a more relevant measure of the return on the Company's common shareholders' equity. These measures are utilized by management to assess the capital adequacy and profitability of the Company.
• Similarly, the Company presents an efficiency ratio-FTE and a tangible efficiency ratio-FTE. The efficiency ratio is computed by dividing noninterest expense by total revenue. Efficiency ratio-FTE is computed by dividing noninterest expense by total revenue-FTE. The tangible efficiency ratio-FTE excludes the amortization related to intangible assets and certain tax credits. The Company believes this measure is useful to investors because, by removing the impact of amortization (the level of which may vary from company to company), it allows investors to more easily compare the Company's efficiency to other companies in the industry. This measure is utilized by management to assess the efficiency of the Company and its lines of business.
• The Company presents the Basel III Common Equity Tier 1 (CET1), on a fully-phased in basis. Fully phased-in ratios consider a 250% risk-weighting for MSRs and deduction from capital of certain carryforward DTAs, the overfunded pension asset, and other intangible assets. The Company believes this measure is useful to investors who wish to understand the Company's current compliance with future regulatory requirements.

Important Cautionary Statement About Forward-Looking Statements

This news release contains forward-looking statements. Statements regarding potential future share repurchases, future expected dividends, and future levels of nonaccruing restructured loans are forward-looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "forecast," "goals," "targets," "initiatives," "focus," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would," and "could." Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Future dividends, and the amount of any such dividend, must be declared by our board of directors in the future in their discretion. Also, future share repurchases and the timing of any such repurchase are subject to market conditions and management's discretion. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in other periodic reports that we file with the SEC.