SunTrust Reports Second Quarter Results

ATLANTA, July 22 /PRNewswire-FirstCall/ -- SunTrust Banks, Inc. (NYSE: STI) said today that improved asset quality and operating trends led to a significantly narrowed loss in the current quarter as compared to the prior year and the first quarter.  The Company reported a net loss available to common shareholders for the second quarter of 2010 of $56 million, or $0.11 per average common share, versus a net loss of $164 million, or $0.41 per average common share, in the second quarter of 2009 and a net loss of $229 million, or $0.46 per average common share, in the first quarter of 2010.  Net income before preferred dividends was $12 million for the second quarter of 2010.

"Our overall operating trends gained momentum with continued asset quality improvement, sequential quarter revenue growth, and favorable deposit volume and mix," said James M. Wells III, chairman and chief executive officer of SunTrust Banks, Inc.  Mr. Wells also noted the slower pace of loan balance decline in addition to continued expense management discipline.

"We continue to execute on our client-focused strategies and position the Company to benefit from opportunities in our markets that will hasten our return to profitability," he added.  "With solid capital and liquidity, we operate from a position of strength.  Lingering operating environment uncertainties notwithstanding, we are encouraged by improving results and prospects."

Second Quarter 2010 Consolidated Highlights

• The net loss of $0.11 per share improved compared to the second quarter of 2009 and the first quarter of 2010.  Net income before preferred dividends was positive this quarter.

• Total revenue trended up over the first quarter of 2010 with broad-based growth across core fee income categories.  Noninterest income included net gains of $57 million on the sale of securities and $63 million in valuation gains on the Company's public debt and related hedges carried at fair value.  

• Relative to the prior year quarter, net interest income increased 8% and margin increased 39 basis points.  Net interest income and margin remained stable compared to the first quarter of 2010.

• Improved asset quality trends continued during the quarter with nonperforming assets, nonaccrual loans, and net charge-offs all declining.  Excluding government guaranteed loan delinquencies, early stage delinquencies were down 6 basis points compared to the first quarter.  

• As a result of improved credit trends, the provision for credit losses declined significantly compared to the prior year and the sequential quarter, while the ratio of allowance for loan losses to total loans remained stable over the prior quarter.  

• Core expenses remain tightly managed, with personnel-related expenses declining compared to the prior quarter and the second quarter of 2009.  The sequential quarter increase in total expenses was significantly affected by debt extinguishment costs in the current quarter of $63 million.  

• The decline in average loans moderated during the quarter, with declines continuing to be concentrated in real estate-related loans.

• Deposits increased as growth in lower-cost deposits was partially offset by a decline in higher-cost time deposits.

• Capital ratios remained strong with an estimated Tier 1 common equity ratio of 7.85% and Tier 1 capital ratio of 13.40%.

CONSOLIDATED FINANCIAL PERFORMANCE

Revenue

For the second quarter of 2010, fully taxable-equivalent total revenue was up 14% on a sequential quarter basis, as noninterest revenues improved across all major fee income categories.  The current quarter included net gains of $57 million on the sale of securities and $63 million in valuation gains on the Company's public debt and related hedges carried at fair value, while the first quarter of 2010 included valuation losses of $20 million.  Compared to the second quarter of 2009, total revenue declined 2%, as higher net interest income in the current period was offset by the $112 million gain from the sale of Visa shares and higher mortgage-related income recorded in the second quarter of 2009.

For the six months, fully taxable-equivalent total revenue was $4,060 million, down 8% from the prior year, despite higher net interest income.  The decline in noninterest income was primarily driven by lower mortgage production and higher mortgage repurchase costs in 2010, as well as a mortgage servicing rights impairment recovery and the Visa gain in 2009.

Net Interest Income

Fully taxable-equivalent net interest income was $1,208 million in the second quarter of 2010, an increase of 8% from the second quarter of 2009, and relatively flat on a sequential quarter basis.  Average earning assets declined $7.7 billion, or 5%, compared to a year ago, primarily attributable to declines in loans and loans held for sale, partially offset by an increase in securities available for sale.   On a sequential basis, the rate of decline in loan balances slowed to 1%.

Net interest margin for the second quarter was 3.33%, up 39 basis points from the same quarter last year, primarily driven by lower funding costs.  Growth in lower-cost deposits and a significant reduction in higher-cost funding sources contributed to a 62 basis point decline in the cost of average interest-bearing liabilities.  Compared to the first quarter of 2010, net interest margin increased 1 basis point, also due to lower funding costs.

For the six months, fully taxable-equivalent net interest income was $2,410 million, an increase of 9% from the prior year, while net interest margin increased 42 basis points to 3.32%.  The same factors in the quarterly year-over-year comparison contributed to the six month increase in net interest income and margin.

Noninterest Income

Total noninterest income was $952 million for the second quarter of 2010, down $120 million, or 11%, from the second quarter of 2009.  The decrease was due to the $112 million gain from the sale of Visa shares in the second quarter of 2009 and a $234 million decline in mortgage-related income.  Market valuation losses on the Company's public debt and related hedges carried at fair value were $96 million in the second quarter of 2009, compared to a gain of $63 million in the current quarter.  Additionally, the current quarter included net gains on the sale of securities of $57 million related to repositioning the investment portfolio, compared to net losses of $25 million in the same quarter of 2009.  On a sequential quarter basis, noninterest income was up $254 million, or 36%, as all service and fee-based revenues showed increases.  The first quarter of 2010 included a $20 million mark-to-market loss on publicly traded debt and related hedges carried at fair value, compared to the gain this quarter as noted above.

Mortgage production income declined $182 million compared to the second quarter of 2009, as production volume declined approximately 60%.  Additionally, estimated mortgage repurchase losses recognized during the current quarter were $148 million, compared to $62 million in the second quarter of 2009.  Compared to the first quarter of 2010, mortgage repurchase reserves increased to $256 million, up $46 million, in response to increased repurchase demands.  Mortgage production income improved $14 million sequentially, despite increased repurchase costs, as loan production was higher.

Mortgage servicing related income for the quarter was $88 million, a decline of $52 million, or 37%, from the second quarter of 2009.  The second quarter of 2009 included a $157 million recovery of impairment on the mortgage servicing rights carried at the lower of cost or market.  The second quarter of 2009 also included $63 million of amortization of servicing rights carried at the lower of cost or market, while in 2010 all servicing rights were carried at fair value, resulting in no amortization.  Mortgage servicing related income increased $17 million, or 24%, from the first quarter of 2010, primarily due to lower fair value-related changes.  As of June 30, 2010, the Company serviced $177.8 billion in mortgage loans, up 3% from the prior year.

Trading account profits and commissions increased $139 million in the second quarter of 2010 over the second quarter of 2009, primarily due to the aforementioned mark-to-market valuation impacts on the Company's public debt.  The mark-to-market gain in the current quarter was driven by the widening of SunTrust's credit spreads.  Revenue from fixed income trading and equity derivatives declined compared to the second quarter of 2009.  On a sequential quarter basis, trading account profits and commissions increased $116 million, primary due to the quarter-over-quarter change in mark-to-market valuations on the Company's public debt.  The current quarter also included net valuation losses of $1 million, compared to a first quarter of 2010 net valuation loss of $16 million on illiquid securities, certain trading assets, and valuation losses related to the deterioration of collateral on previously securitized loans.  Investment banking income declined 20% compared to the record second quarter of 2009, due to decreased equity capital markets activities and a shift of revenue from noninterest income to net interest income upon the consolidation of our commercial paper conduit in the first quarter of 2010.

During the current quarter, consumer and commercial fee-based revenues were mixed compared to the second quarter of 2009.  Card fees and trust and investment management income were up 17% and 9%, respectively, while service charges on deposits and retail investment services showed moderate declines.

For the six months, total noninterest income was $1,650 million, down 25% compared to the same period of 2009.  The decline was largely due to lower mortgage production income from increased repurchase losses and reduced mortgage loan production in 2010, lower mortgage servicing income due to the impairment recoveries recorded in 2009, and the gain on the sale of Visa shares in 2009.  Trends in the first six months related to other fee-based revenues were consistent with the year-over-year quarterly comparisons.

Noninterest Expense

Total noninterest expense in the second quarter of 2010 was $1,503 million, down $25 million, or 2%, from the second quarter of 2009.  Losses on the extinguishment of debt increased and were offset by a decline in personnel expense and lower FDIC insurance costs, as the second quarter of 2009 included the $78 million FDIC special assessment.  Credit-related expenses of $177 million during the current quarter increased slightly compared to the same quarter of 2009; mortgage reinsurance expense and operating losses declined, while other real estate losses increased, primarily related to the sale of residential real estate-related assets and provisions for a decline in property values.  Personnel costs declined due to lower pension expense, as the performance of underlying pension assets improved and discount rates increased.  The debt extinguishment loss of $63 million in the current quarter is primarily related to the extinguishment of $900 million of debt, while the $39 million loss in the second quarter of 2009 primarily resulted from the Company's tender for its hybrid debt securities.  Marketing and customer development expense increased $14 million, or 45%, over the same quarter of 2009 due to increased promotional and advertising spending.  Outside processing and software expense increased $12 million, or 9%, primarily from initiatives aimed at enhancing the client service experience and higher volumes.

On a sequential quarter basis, noninterest expense increased $142 million, or 10%.  Debt extinguishment costs increased $73 million, and credit-related expenses increased $34 million on higher other real estate expenses.  Outside processing and marketing expenses increased $9 million and $10 million, respectively, for the same reasons noted above.

For the six months, total noninterest expense was $2,863 million, a decrease of $817 million, or 22%, over the same period in 2009.  The decline was primarily due to the $751 million non-cash goodwill impairment charge recorded in the first quarter of 2009.  Personnel costs declined $65 million, or 5%, and FDIC insurance expense declined $67 million, primarily due to the special assessment paid in the second quarter of 2009.  Credit-related expenses remained elevated but declined $39 million compared to a year ago.  Debt extinguishment losses increased $41 million, primarily due to the debt retired during the second quarter of 2010.

Income Taxes

For the second quarter, the Company recognized a benefit for income taxes of $50 million, which compares to a benefit of $149 million for the second quarter of 2009.  The difference in the net tax benefit was primarily attributable to the lower level of pre-tax losses; permanent items, such as tax-exempt interest and federal tax credits, were stable.

U.S. Treasury Preferred Dividends

For the second quarter and year-to-date periods of 2010 and 2009, the Company recorded $67 million and $133 million, respectively, in preferred dividends related to the $4.85 billion in preferred securities issued to the U.S. Treasury under the Capital Purchase Program.  The 5.5% effective yield reflects the 5.0% dividend rate and the amortization of the discount recorded on the preferred stock at issuance.

Balance Sheet

As of June 30, 2010, SunTrust had total assets of $170.7 billion and shareholders' equity of $23.0 billion, representing 14% of total assets.  Book value per common share was $36.19 as of June 30, 2010.

Loans

Average loans for the second quarter of 2010 were $113.0 billion, down $11.1 billion, or 9%, compared to the second quarter of 2009.  The decline was concentrated in construction, residential real estate, and commercial loan categories.  SunTrust continues to manage its exposure to residential real estate, most notably real estate construction loans, which declined $3.2 billion, or approximately 50%, from prior year levels.  The $800 million decline in real estate construction loans versus the first quarter of 2010 is the primary driver of the Company's sequential 1% decline in average total loans.  Relative to both the prior year and sequential quarter, consumer direct and indirect loans grew modestly.   While the soft economic environment has continued to reduce borrower demand for credit, the pace of loan declines has slowed, and, during the quarter, loan originations totaled $17.6 billion, including renewals and loan commitments.

Deposits

Average consumer and commercial deposits for the second quarter of 2010 totaled $116.5 billion, up 3% from the second quarter of 2009. As clients continued to migrate to more liquid products, average consumer and other time deposits declined $7.0 billion, or 23%, while demand, NOW and money market accounts increased $9.6 billion, or 12%.  Average total brokered and foreign deposits declined 60% from the second quarter of 2009, as the Company's deposit growth initiatives and longer-term financing activities enabled a reduction in these wholesale funding sources.  On a sequential quarter basis, average consumer and commercial deposits increased 1%, with the majority of the increase in lower-cost deposits.  

Capital and Liquidity

The Company's capital ratios remained strong at June 30, 2010, with estimated Tier 1 common equity, Tier 1 capital, and tangible equity to tangible asset ratios of 7.85%, 13.40%, and 10.18%, respectively.  The Company also has substantial available liquidity, as the inflows of high-quality deposits have largely been retained in cash and invested in high-quality government-backed securities.  

Asset Quality

Improved asset quality trends continued during the quarter with nonperforming assets, nonaccrual loans, and net charge-offs all declining.  Despite these trends, the allowance for loan losses as a percentage of total loans increased to 2.81% as of June 30, 2010, up 1 basis point since March 31, 2010, due to continued economic uncertainty.  The reserve for unfunded commitments ended the quarter at $60 million, down $40 million from March 31, 2010, due to improved credit quality related to certain commercial and large corporate clients.

In the second quarter of 2010, provision for credit losses was $662 million, a decline of $200 million on a sequential quarter basis and a decline of $300 million from the second quarter of 2009.  Net charge-offs in the second quarter of 2010 were $722 million, down $79 million from the same quarter last year and down $99 million on a sequential quarter basis.  Compared to the second quarter of 2009, declines in commercial and home equity line charge-offs more than offset higher construction loan charge-offs.  On a sequential quarter basis, residential mortgage and home equity line charge-offs declined, and construction loan charge-offs increased.  The decline in residential mortgage charge-offs was primarily driven by actions taken in the first quarter of 2010 related to the transfer of a specific group of nonperforming loans to held for sale, as well as incremental charge-offs recognized on severely delinquent loans collateralized by properties in jurisdictions with extended foreclosure periods.  During the second quarter of 2010, the sale of the loans transferred to held for sale was completed, and final pricing was consistent with expectations.

Nonaccrual loans were $4,699 million, or 4.16% of total loans, as of June 30, 2010, compared to $5,185 million, or 4.55% of total loans, as of March 31, 2010.  The $486 million decrease was driven primarily by nonaccrual construction loans declining $225 million, or 14%, and residential mortgages declining $308 million, or 13%.  Nonaccrual loans declined $805 million, or 15%, compared to June 30, 2009, due to reductions in residential mortgage and construction loans, partially offset by an increase in commercial real estate loans.  The overall decline in nonaccrual loans was due to charge-offs recognized, the migration of loans to other real estate owned, and reduced inflows into nonaccrual.  Nonperforming assets also declined $702 million, or 11%, compared to June 30, 2009, and $580 million, or 10%, compared to March 31, 2010.  The allowance to nonperforming loans was 67.64% as of June 30, 2010, up 590 basis points from March 31, 2010.  Early stage delinquencies as of June 30, 2010, increased 7 basis points to 1.26% compared to the first quarter; however, excluding government guaranteed loan delinquencies, early stage delinquencies were down 6 basis points.

As a result of continued efforts to work with clients that are experiencing financial difficulties, loan modifications have increased.  Accruing restructured loans, primarily residential real estate-related, increased to $2.3 billion, up $361 million over the prior quarter end.  Nonaccruing restructured loans remained relatively stable at $986 million, with commercial-related loans representing $204 million of the total.

LINE OF BUSINESS FINANCIAL PERFORMANCE

Line of Business Results

The Company has included line of business financial tables as part of this release on their Web site at www.suntrust.com in the Investor Relations section located under "About SunTrust."  During the second quarter of 2010 the Company adjusted its lines of business used to measure business activities to align with certain organizational changes implemented during the quarter.  The Company's business segments are: Retail Banking, Diversified Commercial Banking, Corporate and Investment Banking, Mortgage, Wealth and Investment Management, and Commercial Real Estate.  All revenue in the line of business tables is reported on a fully taxable-equivalent basis.  For the lines of business, results include net interest income, which is computed using matched-maturity funds transfer pricing.  Further, provision for loan losses is represented by net charge-offs.  SunTrust also reports results for Corporate Other and Treasury, which includes the Treasury department as well as the residual expense associated with operational and support expense allocations.  This segment also includes differences created between internal management accounting practices and generally accepted accounting principles, certain matched-maturity funds transfer pricing credits and charges, differences in provision for loan losses compared to net charge-offs, as well as equity and its related impact.  A detailed discussion of the line of business results will be included in the Company's forthcoming quarterly report on 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 quarterly report on Form 10-Q. Detailed financial tables and other information are also available on the Company's Web site at www.suntrust.com in the Investor Relations section located under "About SunTrust." This information is also included in a current report on Form 8-K furnished with the Securities and Exchange Commission today.

Conference Call

SunTrust management will host a conference call on July 22, 2010, 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: 2Q10). Individuals calling from outside the United States should dial 1-517-308-9091 (Passcode: 2Q10). A replay of the call will be available approximately one hour after the call ends on July 22, 2010, and will remain available until August 5, 2010, by dialing 1-800-879-7389 (domestic) or 1-402-220-5339 (international).

Alternatively, individuals may listen to the live webcast of the presentation by visiting the SunTrust Web site at www.suntrust.com. The webcast will be hosted under "Investor Relations," located under "About SunTrust," or may be accessed directly from the SunTrust home page by clicking on the earnings-related link, "2nd Quarter Earnings Release." Beginning the afternoon of July 22, 2010, listeners may access an archived version of the webcast in the "Webcasts and Presentations" subsection found under "Investor Relations." 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 high-growth 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 may contain forward-looking statements. Statements regarding future levels of net interest margin, future levels of and rates of change in delinquencies (including within the consumer, commercial and industrial, and commercial real estate portfolios), future levels of charge-offs (including within the construction, higher risk  residential real estate secured and construction, core mortgage, and commercial and industrial portfolios), future levels of the allowance for loan losses, future levels of service charge income, future performance of the commercial and industrial and commercial real estate portfolios, and the number or rates of change in the number of residential or commercial real estate modifications, 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," "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. Such statements speak as of the date hereof, and we do not assume any obligation to update the statements made herein 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. Factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Item 1A of Part I of our 10-K and in other periodic reports that we file with the SEC. Those factors include: difficult market conditions have adversely affected our industry; recent levels of market volatility are unprecedented; we are subject to capital adequacy guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected; recently enacted legislation, or legislation enacted in the future, or any proposed federal programs subject us to increased regulation and may adversely affect us; we have not yet received permission to repay TARP funds; emergency measures designed to stabilize the U.S. banking system are beginning to wind down; we are subject to credit risk; weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, has adversely affected us and may continue to adversely affect us; weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us and may continue to adversely affect us; as a financial services company, adverse changes in general business or economic conditions could have a material adverse effect on our financial condition and results of operations; changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital or liquidity; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; we may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations, and financial condition; we may continue to suffer increased losses in our loan portfolio despite enhancement of our underwriting policies; depressed market values for our stock may require us to write down goodwill; clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; consumers may decide not to use banks to complete their financial transactions, which could affect net income; we have businesses other than banking which subject us to a variety of risks; hurricanes and other natural disasters may adversely affect loan portfolios and operations and increase the cost of doing business; negative public opinion could damage our reputation and adversely impact business and revenues; we rely on other companies to provide key components of our business infrastructure; the soundness of other financial institutions could adversely affect us; we rely on our systems, employees, and certain counterparties, and certain failures could materially adversely affect our operations; we depend on the accuracy and completeness of information about clients and counterparties; we are subject to certain litigation, and our expenses related to this litigation may adversely affect our results; regulation by federal and state agencies could adversely affect the business, revenue, and profit margins; competition in the financial services industry is intense and could result in losing business or reducing margins; future legislation could harm our competitive position; maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services; we may not pay dividends on your common stock; our ability to receive dividends from our subsidiaries accounts for most of our revenue and could affect our liquidity and ability to pay dividends; significant legal actions could subject us to substantial uninsured liabilities; recently declining values of real estate, increases in unemployment, and the related effects on local economies may increase our credit losses, which would negatively affect our financial results; deteriorating credit quality, particularly in real estate loans, has adversely impacted us and may continue to adversely impact us; our allowance for loan losses may not be adequate to cover our eventual losses; we will realize future losses if the proceeds we receive upon liquidation of nonperforming assets are less than the carrying value of such assets; disruptions in our ability to access global capital markets may negatively affect our capital resources and liquidity; in 2009 and 2010, credit rating agencies downgraded the credit ratings of SunTrust Bank and SunTrust Banks, Inc., and these downgrades and any subsequent downgrades could adversely impact the price and liquidity of our securities and could have an impact on our businesses and results of operations; we have in the past and may in the future pursue acquisitions, which could affect costs and from which we may not be able to realize anticipated benefits; we depend on the expertise of key personnel, and if these individuals leave or change their roles without effective replacements, operations may suffer; we may not be able to hire or retain additional qualified personnel and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs and reduce profitability and may adversely impact our ability to implement our business strategy; our accounting policies and processes are critical to how we report our financial condition and results of operations, and require management to make estimates about matters that are uncertain; changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition; our stock price can be volatile; our disclosure controls and procedures may not prevent or detect all errors or acts of fraud; our financial instruments carried at fair value expose us to certain market risks; our revenues derived from our investment securities may be volatile and subject to a variety of risks; and we may enter into transactions with off-balance sheet affiliates or our subsidiaries.

SOURCE SunTrust Banks, Inc.