SunTrust Reports Third Quarter 2013 Results

ATLANTA, Oct. 18, 2013 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) today reported net income available to common shareholders of $179 million, or $0.33 per average common diluted share, for the third quarter of 2013.  The current quarter's results were negatively affected by $0.33 per share due to specific items the Company previously announced on October 10, 2013 (summarized below).  Excluding these items, earnings per share was $0.66, which compares to earnings per share of $0.68 in the prior quarter.  The reported earnings per share for the third quarter of last year was $1.98, which included a positive $1.40 related to specific balance sheet actions; excluding those items, earnings per share was $0.58.  Earnings per share, excluding significant items impacting this quarter and the third quarter of 2012, increased 14% compared to last year. 

Summary of October 10, 2013 8-K Items

• The Company resolved certain legacy legal matters, most notably regarding Federal Housing Administration origination practices and the National Mortgage Servicing Settlement, which negatively impacted noninterest expense by $323 million.
• As a result of the repurchase settlements reached with Freddie Mac and Fannie Mae, an additional $63 million was added to the Company's mortgage repurchase reserve, which negatively affected noninterest income.
• The Company concluded an expanded review of its servicing advance practices and subsequently increased its allowance for servicing advances, which negatively impacted noninterest expense by $96 million.  
• Certain tax matters resulted in a combined after-tax benefit of $113 million that positively affected the provision for income taxes.
• In aggregate, the above items negatively impacted net income available to common shareholders in the third quarter by $179 million, after-tax, or $0.33 per share.

"Notable core operating trends continued this quarter, including steady loan growth, disciplined expense management, and further credit quality improvement, despite the challenging mortgage environment," said William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc.  "Resolving these legacy mortgage matters allows us to focus our efforts on the considerable opportunities that exist in all of our businesses as we concentrate on meeting more clients' needs."

Third Quarter2013 Financial Highlights

Income Statement

• Net income available to common shareholders was $179 million, or $0.33 per average common diluted share, which was negatively affected by $0.33 per share due to the aforementioned significant items.  Excluding these items, earnings per share was $0.66, compared to $0.68 in the prior quarter.    
• Net interest income was substantially unchanged relative to the previous quarter as six basis points of net interest margin compression was largely offset by growth in average earning assets of 0.5% and one additional day in the current quarter.     
• Noninterest income decreased compared to the prior quarter due primarily to a significant decline in core mortgage production income, as well as the additional mortgage repurchase provision recognized in conjunction with the agency mortgage repurchase settlements.  Investment banking had another strong quarter, and mortgage servicing income also increased relative to the prior quarter.  
• Noninterest expense increased $346 million compared to the prior quarter due to the resolution of the aforementioned significant items.  Excluding the impact of these items, noninterest expense declined $73 million sequentially, primarily due to lower employee compensation and benefits expense. 

Balance Sheet

• Average performing loans increased $1.6 billion on a sequential quarter basis with growth across several loan portfolios.  Average performing loans were stable compared to the third quarter of last year, as targeted growth in C&I loans offset the impact from the sales of government guaranteed loans in the second half of 2012.   
• Average client deposits were stable compared to the prior quarter and increased $1.3 billion from the third quarter of last year, with the favorable mix shift toward lower-cost deposits continuing.

Capital

• Estimated capital ratios continued to be well above regulatory requirements.  The Tier 1 common equity ratio was an estimated 9.92%.
• In conjunction with its capital plans announced in the first quarter, the Company repurchased an additional $50 million of its common shares during the third quarter and paid a quarterly common stock dividend of $0.10 per share. 

Asset Quality

• The risk profile of the balance sheet continued to improve.  Nonperforming loans decreased 9% during the quarter and were 0.83% of total loans at September 30, 2013, compared to 0.94% last quarter and 1.42% for the third quarter of 2012. 
• Annualized net charge-offs decreased to 0.47% of average loans compared to 0.59% and 1.64% in the prior quarter and the third quarter of last year, respectively.
• Current quarter nonperforming loans and net charge-offs were at their lowest levels in six years.
• In light of improved credit quality, the provision for credit losses declined 35% compared to the prior quarter and 79% compared to the third quarter of last year.

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

Revenue

Total revenue was $1.9 billion for the current quarter, a decrease of $180 million, or 9%, compared to the prior quarter.  The decline was primarily driven by lower mortgage production income (including the incremental provision arising from the agency mortgage repurchase settlements) and the impairment of certain lease financing assets.  Total revenue, excluding net securities gains, was substantially unchanged compared to the third quarter of last year as lower net interest income and mortgage related revenues, excluding the repurchase provision, were offset by a  lower mortgage repurchase provision and the impact of transferring certain loans to held for sale in the third quarter of last year.  In addition, compared to last year, the Company experienced solid growth in wealth management and investment banking income revenue.

Total revenue was $6.1 billion for the nine months ended September 30, 2013.  Total revenue was $8.3 billion for the nine months ended September 30, 2012, and included $2.0 billion of net securities gains.  Excluding net securities gains, the decline was driven by lower net interest income and mortgage-related revenues, excluding the repurchase provision, partially offset by a lower mortgage repurchase provision and higher investment banking and wealth management revenues.

Net Interest Income

Net interest income was $1.2 billion for the current quarter, substantially unchanged from the prior quarter as a lower net interest margin was largely offset by higher average earning asset balances.  Net interest income decreased $61 million compared to the third quarter of last year.  The decline was driven by lower earning asset yields, the impact of loan sales in the second half of 2012, and a decrease in commercial loan-related swap income.  Partially offsetting these impacts was lower interest expense driven by decreases in deposit rates, a reduction in long-term debt, and a favorable shift in the deposit mix.

The net interest margin for the third quarter was 3.19%, a decrease of six basis points from the prior quarter as  earning asset yields declined seven basis points as a result of the continued low interest rate environment.  The decrease in earning asset yields was partially offset by a two basis point reduction in interest-bearing liability costs due to a modest decrease in deposit rates. The 19 basis point decline in the net interest margin from the third quarter of last year was primarily due to a 30 basis point decrease in earning asset yields, driven by the continued low interest rate environment, partially offset by a 14 basis point reduction in rates paid on interest-bearing liabilities, primarily on time deposits and long-term debt.

For the nine months ended September 30, 2013, net interest income was $3.7 billion, a decrease of $216 million, or 5%, compared to the first nine months of 2012.  For the same time periods, the net interest margin was 3.25% in 2013 compared to 3.42% in 2012.  The primary drivers of the decreases in net interest income and net interest margin are consistent with those described in the quarterly comparisons above; further contributing to the decline was the foregone dividend income in 2013 related to the third quarter of 2012 early termination of agreements regarding the shares formerly owned in The Coca-Cola Company.

Noninterest Income

Total noninterest income was $680 million for the current quarter compared to $858 million for the prior quarter and $2.5 billion for the third quarter of last year.  Excluding securities gains, total noninterest income was $680 million for the current quarter compared to $858 million for the prior quarter and $601 million for the third quarter of last year.  Compared to the prior quarter, the $178 million decrease was primarily due to lower mortgage-related income, including the impact of both a higher provision for mortgage repurchases related to agency settlements reached during the current quarter and a decline in core mortgage production income, as well as the impact of impairment of certain lease financing assets in the current quarter.  Compared to the third quarter of last year, the $79 million increase was due to a reduction in the mortgage repurchase provision, lower valuation losses on held for sale student and mortgage loans and the Company's fair value debt, and broad based increases in fee income, particularly wealth management and investment banking.  These increases were partially offset by reductions in core mortgage production income and mortgage servicing income. 

Mortgage production income for the current quarter was a loss of $10 million compared to income of $133 million for the prior quarter and a loss of $64 million for the third quarter of last year.  The $143 million sequential quarter decrease was driven by (i) declines in production volume and gain on sale margins due to the increase in mortgage rates and (ii) an increase in the mortgage repurchase provision related to the previously announced agency repurchase settlements.  Compared to the third quarter of last year, mortgage production income increased $54 million due to the decline in the mortgage repurchase provision, which was partially offset by reduced production volume and gain on sale margins.  At September 30, 2013, the reserve for mortgage repurchases totaled $281 million, which was net of the cash payment to Freddie Mac regarding the previously announced settlement agreement; the reserve is expected to significantly decline in the fourth quarter of 2013 once the cash payment associated with the Fannie Mae settlement is made.

Mortgage servicing income was $11 million for the current quarter compared to $1 million for the prior quarter and $64 million for the third quarter of last year.  The $10 million sequential quarter increase was largely due to a slower pace of loan prepayments impacting the mortgage servicing asset value.  The $53 million decline compared to the third quarter of last year was due primarily to lower net hedge performance.  At September 30, 2013, the servicing portfolio was $140 billion compared to $150 billion at September 30, 2012.

Investment banking income was $99 million for the current quarter compared to $93 million in the prior quarter and $83 million in the third quarter of last year.  The increases were driven by growth in M&A advisory and equity transaction fee revenue. 

Trading income was $33 million for the current quarter compared to $49 million for the prior quarter and $19 million for the third quarter of last year.  The $16 million sequential quarter decrease was due to a $6 million mark-to-market valuation loss on the Company's fair value debt in the current quarter compared to a valuation gain of $8 million in the prior quarter.  The $14 million increase in trading income compared to the third quarter of last year was largely driven by a $41 million decline in mark-to-market valuation losses on the Company's fair value debt, partially offset by a decline in core trading income, which was impacted by reduced client fixed income trading activity.

Other noninterest income was $10 million for the current quarter compared to $44 million for the prior quarter and a loss of $31 million for the third quarter of last year.  The $34 million sequential quarter decrease was driven by a $37 million impairment of lease financing assets as a result of updated market indications of the residual values of certain assets.  The $41 million increase from the third quarter of last year was due to a $92 million loss in the third quarter of last year related to guaranteed student and mortgage loans transferred to held for sale, partially offset by the current quarter lease financing impairment.

For the nine months ended September 30, 2013, noninterest income was $2.4 billion. For the nine months ended September 30, 2012, noninterest income was $4.4 billion and included $2.0 billion of net securities gains.  Excluding net securities gains, noninterest income was relatively unchanged over these two nine-month periods.  Declines in core mortgage production income and mortgage servicing income were offset by a reduction in the mortgage repurchase provision and higher investment banking and wealth management revenue. 

Noninterest Expense

Noninterest expense was $1.7 billion for the current quarter compared to $1.4 billion for the prior quarter and $1.7 billion for the third quarter of last year.  The sequential quarter increase of $346 million was entirely due to the current quarter impacts from the legal settlements and the increase in the mortgage servicing advances allowance announced on October 10, 2013, and partially offset by lower employee compensation expense.  The $17 million, or 1%, increase from the third quarter of last year was also a result of the previously announced actions impacting the current quarter, largely offset by declines in almost all other noninterest expense categories due to improved efficiency, as well as valuation losses recognized in the third quarter of last year related to the planned sale of affordable housing investments.   

Employee compensation and benefits expense was $682 million in the current quarter compared to $737 million for the prior quarter and $780 million for the third quarter of last year.  Of the sequential quarter decrease of $55 million, $37 million pertained to a reversal of previously accrued incentive compensation, in light of this quarter's lower corporate profitability.  The $98 million decrease from the third quarter of last year was due primarily to the same factors as the sequential quarter decline, as well as a 6% reduction in full-time equivalent employees in the current quarter compared to the third quarter of last year.

Operating losses were $350 million in the current quarter compared to $72 million in the prior quarter and $71 million in the third quarter of last year.  The increases compared to the prior quarter and third quarter of last year were due to the previously announced legal matters that were resolved this quarter. 

Compared to the prior quarter, FDIC insurance and regulatory expense increased $4 million due to incremental regulatory supervisory fees.  The $22 million decline compared to the third quarter of last year was due to a decrease in the Company's FDIC insurance assessment rate, reflecting the Company's reduced risk profile.  Outside processing and software expenses were stable compared to the prior quarter and increased $19 million compared to the third quarter of last year, primarily due to technology and training investments.  Marketing and customer development was stable sequentially, but decreased $41 million from the third quarter of last year as a result of the Company's charitable contribution of previously owned shares in The Coca-Cola Company during the third quarter of last year.

Other noninterest expense was $305 million in the current quarter compared to $191 million in the prior quarter and $402 million for the third quarter of last year.  The $114 million increase from the prior quarter was primarily driven by higher collections expenses related to the previously announced servicing advances reserve increase. The $97 million decrease from the third quarter of last year was primarily due to specific third quarter of 2012 actions, including a $96 million valuation loss related to affordable housing investments, $29 million in severance expense, and $17 million in real estate charges as the Company reassessed some of its corporate real estate leases and holdings.  Also driving the decline from the third quarter of last year were decreases in other real estate and consulting expenses, partially offset by higher collection expense related to the servicing advances reserve increase.

For the nine months ended September 30, 2013, noninterest expense was $4.5 billion compared to $4.8 billion in 2012.  The $310 million, or 6%, decrease was due to the continued declines across most expense categories due to improved efficiency, partially offset by the expenses related to the previously announced actions this quarter.

Income Taxes

For the current quarter, the Company recorded an income tax benefit of $146 million compared to income tax expenses of $146 million for the prior quarter and $551 million for the third quarter of last year. The tax benefit in the current quarter was due to the impacts of the October 10, 2013 8-K items, including the completion of a taxable reorganization of certain subsidiaries.  The high level of income tax expense in the third quarter of 2012 was primarily driven by the taxable gain the Company recognized upon the early termination of the agreements regarding the shares it previously owned in The Coca-Cola Company.   

Balance Sheet

At September 30, 2013, the Company had total assets of $172 billion and shareholders' equity of $21 billion, representing 12% of total assets. Book value and tangible book value per common share increased slightly compared to June 30, 2013, and were $37.85 and $26.27, respectively. 

Loans

Average performing loans were $121.6 billion for the current quarter, an increase of $1.6 billion, or 1%, from the prior quarter driven by growth in most loan categories, most notably a $788 million, or 4%, increase in nonguaranteed residential mortgage loans and a $353 million, or 8%, increase in commercial real estate loans. Partially offsetting the average quarterly increase was a decline in government guaranteed residential mortgage loans of $242 million, or 6%.  Average performing loans decreased $124 million compared to the third quarter of last year.  The decline was due to government guaranteed student and mortgage loans, which decreased $1.7 billion and $1.9 billion, respectively, due to sales during 2012.  Partially offsetting these declines were increases in C&I loans of $2.7 billion, or 5%, and consumer loans (excluding guaranteed student loans) of $861 million, or 6%. 

Deposits

Average client deposits for the current and prior quarter were $126.6 billion compared to $125.4 billion for the third quarter of last year.  Average deposits increased $39 million during the quarter due to a $1.2 billion, or 3%, increase in money market balances, which was almost entirely offset by declines in other deposit product balances.  The $1.3 billion, or 1%, increase compared to the third quarter of last year was driven by lower-cost deposit growth of $3.5 billion, or 3%, partially offset by a decrease of $2.2 billion, or 14%, in time deposits.          

Capital and Liquidity

The Company's estimated capital ratios are well above current regulatory requirements with Tier 1 capital and Tier 1 common ratios at an estimated 10.95% and 9.92%, respectively, at September 30, 2013.  The capital ratios increased moderately from the third quarter of last year and decreased from the prior quarter. The sequential quarter decrease was a result of the Company's refinement to the risk weighting of certain unused lending commitments. The treatment of these particular unused lending commitments is not applicable under the Basel III capital calculation rules and, as a result, had no impact on the Company's current quarter estimated Basel III Tier 1 common ratio. The ratios of total average equity to total average assets and tangible equity to tangible assets were 12.24% and 8.98%, respectively, at September 30, 2013, both stable to the prior quarter and higher than the third quarter of last year.  The Company continues to have substantial available liquidity provided in the form of its client deposit base, other available funding resources, its portfolio of high-quality government-backed securities, and cash. 

During the current quarter, the Company declared a common stock dividend of $0.10 per common share, consistent with the prior quarter and up $0.05 per share from the third quarter of last year.  Additionally, during the current quarter, the Company repurchased $50 million of common stock, bringing the total purchased in 2013 to $100 million with plans to repurchase up to an additional $100 million of common stock by the end of the first quarter of 2014, pursuant to the Company's 2013 capital plan.

Asset Quality

Asset quality continued to steadily improve, including further decreases in nonperforming loans and nonperforming assets, both of which reached their lowest levels since the third quarter of 2007.  Nonperforming loans totaled $1.0 billion at September 30, 2013, down $104 million, or 9%, relative to the prior quarter, led by declines in residential mortgages and home equity loans.  Compared to a year ago, nonperforming loans decreased $694 million, or 40%, with reductions across all loan categories, most significantly in residential mortgages, home equity loans, commercial real estate, and C&I loans.  The decline from a year ago was partially related to the sale of $160 million of nonperforming mortgage and commercial real estate loans in the fourth quarter of 2012.  At September 30, 2013, the percentage of nonperforming loans to total loans was 0.83%, down from 0.94% and 1.42% at the end of the prior quarter and third quarter of last year, respectively.  Other real estate owned totaled $196 million at the end of the current quarter, stable with the prior quarter and down 36% from a year ago.       

Net charge-offs were $146 million during the current quarter compared to $179 million for the prior quarter and $511 million for the third quarter of last year.  The decreases in net charge-offs from the prior quarter and third quarter of last year were primarily driven by lower residential loan charge-offs.  The decline from the third quarter of last year was further affected by charge-offs related to sales of nonperforming residential mortgage and commercial real estate loans in the third quarter of last year, as well as a revision to the Company's credit policy in the third quarter of last year related to the timing of recognizing charge-offs on junior lien loans.

The ratios of annualized net charge-offs to total average loans were 0.47% for the current quarter, 0.59% for the prior quarter, and 1.64% for the third quarter of last year.  The net charge-off ratio in the current quarter was at the lowest level since the third quarter of 2007.  The prior year was affected by the aforementioned nonperforming loan sales and credit policy change that added 76 basis points to the net charge-off ratio. The provision for credit losses was $95 million, which decreased $51 million and $355 million from the prior quarter and the third quarter of last year, respectively.

At September 30, 2013, the allowance for loan losses was $2.1 billion and represented 1.67% of total loans, down eight basis points from June 30, 2013.  Excluding government guaranteed loans, the allowance for loan losses was 1.80% of total loans, down nine basis points from June 30, 2013.  The $54 million decrease in the allowance for loan losses during the current quarter was reflective of the continued improvement in asset quality.

Early stage delinquencies decreased six basis points from the prior quarter to 0.65% at September 30, 2013.  The decrease was primarily due to residential loans.  Excluding government-guaranteed loans, early stage delinquencies were 0.35%, a decrease of five basis point from June 30, 2013.

Accruing restructured loans totaled $2.7 billion, and nonaccruing restructured loans totaled $0.4 billion at September 30, 2013.  $2.9 billion of restructured loans related to residential loans, $0.2 billion were commercial loans, and $0.1 billion related to consumer loans.

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Business Segment Results

The Company has included business segment financial tables as part of this release on the Investor Relations portion of its website at www.suntrust.com/investorrelations. The Company's business segments include: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking. 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 is represented by net charge-offs. 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 generally accepted accounting principles ("GAAP"), certain matched-maturity funds transfer pricing credits and charges, differences in provision for credit losses compared to net charge-offs, as well as equity and its related impact. A detailed discussion of the business segment results will be included in the Company's forthcoming Form 10-Q.

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-Q. Detailed financial tables and other information are also available on the Investor Relations portion of the Company's website at www.suntrust.com/investorrelations. 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 October 18, 2013, 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: 3Q13). Individuals calling from outside the United States should dial 1-517-308-9091 (Passcode: 3Q13). A replay of the call will be available approximately one hour after the call ends on October 18, 2013, and will remain available until November 18, 2013, by dialing 1-866-481-6893 (domestic) or 1-203-369-1572 (international). Alternatively, individuals may listen to the live webcast of the presentation by visiting the SunTrust investor relations website at www.suntrust.com/investorrelations. Beginning the afternoon of October 18, 2013, listeners may access an archived version of the webcast in the "Recent Earnings and Conference Presentations" subsection found on the investor relations webpage. This webcast will be archived and available for one year. A link to the Investor Relations page is also found in the footer of the SunTrust home page.

SunTrust Banks, Inc., headquartered in Atlanta, is one of the nation's largest banking organizations, serving a broad range of consumer, commercial, corporate and institutional clients. The Company operates an extensive branch and ATM network throughout the Southeast and Mid-Atlantic States and a full array of technology-based, 24-hour delivery channels. The Company also serves clients in selected markets nationally. Its primary businesses include deposit, credit, and trust and investment management services. Through various subsidiaries, the Company provides mortgage banking, insurance, brokerage, equipment leasing, and capital markets services. SunTrust's Internet address is www.suntrust.com.

Important Cautionary Statement About Forward-Looking Statements

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. In this news release, the Company presents net interest income and net interest margin on a fully taxable-equivalent ("FTE") basis, and ratios on an annualized basis. The FTE basis adjusts for the tax-favored status of income from certain loans and investments. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

This news release contains forward-looking statements. Statements regarding estimates of the after-tax financial impact of various legal and regulatory matters, potential future share repurchases, and future expected dividends 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," "goals," "targets," "initiatives," "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. The estimated financial impact of these legal and regulatory matters depends upon (1) the successful negotiation, execution, and delivery of definitive agreements in several matters, (2) the ultimate resolution of certain legal matters which are not yet complete, (3) management's assumptions about the extent to which such amounts may be deducted for tax purposes, (4) the agreement of other necessary parties, and (5) our assumptions about the extent to which we can provide consumer relief to satisfy our financial obligations as contemplated by the agreements in principle with regulators. 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, 2012 and in other periodic reports that we file with the SEC.

SOURCE SunTrust Banks, Inc.