SunTrust Reports Second Quarter 2016 Results

ATLANTA, July 22, 2016 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) reported net income available to common shareholders of $475 million, or $0.94 per average common diluted share.   This quarter was favorably impacted by $0.05 per share of discrete benefits (details can be found on page 2).

Earnings per share increased 12% compared to the prior quarter and 6% compared to the second quarter of 2015.  For the first half of 2016, earnings per share grew 7% compared to the same period a year ago.

"Our performance this quarter is further indication of our ability to deliver on our commitments," said William H. Rogers, Jr., chairman and CEO of SunTrust Banks, Inc. "The consistent execution of our core strategies, combined with the diversity of our business model, resulted in solid revenue growth, strong improvements in efficiency, and significantly higher capital return to shareholders.  Despite the impact of the continued low interest rate environment, we remain committed to helping our clients and communities improve their financial confidence, thereby helping our shareholders continue to outperform."

Second Quarter 2016 Financial Highlights   (Commentary is on a fully taxable-equivalent basis unless otherwise noted. Consistent with SEC Industry Guide 3, net interest income, net interest margin, and total revenue 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 a detailed reconciliation and additional information on page 13.)

Income Statement

• Net income available to common shareholders was $475 million, or $0.94 per average common diluted share, compared to $0.84 for the first quarter of 2016 and $0.89 for the second quarter of 2015.
  • Earnings per share increased 6% compared to the second quarter of 2015
  • Current quarter earnings included a net $0.05 per share benefit from discrete items
    • $44 million (pre-tax) in net asset-related gains, primarily related to a gain from the sale-leaseback of an office building (recorded in other noninterest income)
    • $21 million (pre-tax) in discrete charges related to ongoing efficiency initiatives (recorded in other noninterest expense)
    • $9 million discrete tax benefit (recorded in provision for income taxes)
• Total revenue increased 6% compared to the prior quarter and 7% compared to the second quarter of 2015.
  • Sequential revenue growth was driven by a 15% increase in noninterest income, most notably mortgage-related income, other noninterest income (favorably impacted by the aforementioned net asset-related gains), and investment banking income.
  • Compared to the second quarter of 2015, revenue growth was driven by a 10% increase in net interest income and 3% growth in noninterest income.
• Net interest margin was 2.99% in the current quarter, down 5 basis points sequentially and up 13 basis points compared to the prior year.
• Provision for credit losses increased sequentially and compared to the prior year, due primarily to higher energy-related charge-offs, moderating asset quality improvements, and loan growth.
• Noninterest expense increased 2% sequentially and 1% compared to the prior year, driven largely by the aforementioned $21 million in discrete charges related to ongoing efficiency initiatives.
• The efficiency and tangible efficiency ratios in the current quarter were 60.6% and 60.1%, respectively, which represent significant improvements compared to the prior quarter and prior year.

Balance Sheet

• Average loan balances increased 2% sequentially and 6% compared to the second quarter of 2015, with growth across most loan categories.
• Average consumer and commercial deposits increased 3% sequentially and 8% compared to the second quarter of 2015, primarily related to NOW and money market account balances.

Capital

• Estimated capital ratios continue to be well above regulatory requirements. The Common Equity Tier 1 ("CET1") ratio was estimated to be 9.8% as of June 30, 2016, and 9.7% on a fully phased-in basis.
• During the quarter, the Company:
  • Repurchased $175 million of its outstanding common stock, which completed its 2015 capital plan.
  • Announced its 2016 capital plan, which includes:
    • The purchase of up to $960 million of its outstanding common stock between the third quarter of 2016 and the second quarter of 2017.
    • An 8% increase in the quarterly common stock dividend from $0.24 per share to $0.26 per share, beginning in the third quarter of 2016, subject to approval by the Company's Board of Directors.
• Book value per share was $46.14 and tangible book value per share was $33.98, both up 3% compared to March 31, 2016.

Asset Quality

• Nonperforming loans declined $31 million from the prior quarter and represented 0.67% of total loans at June 30, 2016. The sequential decrease was driven by the resolution of certain energy-related loans.
• Net charge-offs for the current quarter were $137 million, or 0.39% of average loans on an annualized basis, up $52 million and $50 million compared to the prior quarter and the second quarter of 2015, respectively. The current quarter included $70 million in energy-related net charge-offs.
• The provision for credit losses increased $45 million sequentially due to higher energy-related charge-offs and moderating asset quality improvements.
• At June 30, 2016, the allowance for loan and lease losses (ALLL) to period-end loans ratio declined 2 basis points to 1.25%, as an increase in the commercial ALLL ratio was offset by a decline in the residential ALLL ratio, as a result of continued improvements in the asset quality of the residential loan portfolio.

 

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, an increase of $122 million compared to the prior quarter.  The 6% increase was driven by broad-based growth in noninterest income, most notably mortgage-related income, other income (favorably impacted by $44 million in net asset-related gains), and investment banking income. Net interest income increased slightly as a result of loan growth, partially offset by net interest margin compression.  Compared to the second quarter of 2015, total revenue increased $144 million, or 7%, due to strong growth in net interest income and higher noninterest income, particularly mortgage-related revenue and the aforementioned asset-related gains.

For the six months ended June 30, 2016, total revenue was $4.3 billion, an increase of $250 million, or 6%, compared to the first six months of 2015. The increase was driven by higher net interest income and mortgage-related income.

Net Interest Income

Net interest income was $1.3 billion for the current quarter, an increase of $5 million compared to the prior quarter due primarily to loan growth, partially offset by net interest margin compression. Compared to the second quarter of 2015, the $120 million increase in net interest income was driven by loan growth and a higher net interest margin. 

Net interest margin for the current quarter was 2.99%, compared to 3.04% in the prior quarter and 2.86% in the second quarter of 2015.  When compared to the prior quarter, the 5 basis point decrease was largely driven by lower earning asset yields due to the decline in long-term yields in 2016. The 13 basis point increase in net interest margin compared to the second quarter of 2015 was due primarily to higher benchmark interest rates and lower premium amortization in the securities portfolio.

For the six months ended June 30, 2016, net interest income was $2.6 billion, a $262 million increase compared to the first six months of 2015.  The net interest margin was 3.01% for the first half of 2016, a 16 basis point increase compared to the same period in 2015. The increase in both net interest income and net interest margin were driven by the same factors that impacted the year-over-year comparisons discussed above.

Noninterest Income

Noninterest income was $898 million for the current quarter, compared to $781 million for the prior quarter and $874 million for the second quarter of 2015.  The $117 million sequential increase was related primarily to higher mortgage-related and investment banking income, as well as the $44 million in net asset-related gains, partially offset by a decrease in trading income driven primarily by an increase in counterparty credit valuation reserves on the Company's derivative portfolio. Compared to the second quarter of 2015, noninterest income increased $24 million, driven by higher mortgage-related revenue and the aforementioned asset-related gains, partially offset by lower capital markets and wealth management-related income.

Investment banking income was $126 million for the current quarter, compared to $98 million in the prior quarter and $145 million in the second quarter of 2015.  The sequential increase was due to strong client-driven activity across most products, particularly in syndicated finance, investment grade bond originations and equity capital markets.  Compared to the second quarter of 2015, the decrease was due to record results a year ago driven by syndicated finance activity, partially offset by higher investment grade bond originations and equity capital markets in the current quarter.

Trading income was $34 million for the current quarter, compared to $55 million in the prior quarter and $54 million in the second quarter of 2015.  The sequential and year-over-year decreases were driven primarily by an increase in counterparty credit valuation reserves as a result of an adjustment to the internal reserve methodology and lower interest rates in the quarter.

Mortgage production income for the current quarter was $111 million, compared to $60 million for the prior quarter and $76 million for the second quarter of 2015.  The $51 million increase from the prior quarter and $35 million increase compared to the second quarter of 2015 were both due primarily to a significant increase in production volume and higher gain-on-sale margins, which were modestly impacted by a product offering change to include upfront origination fees in the loan yield. Mortgage application volume increased 22% sequentially and 27% compared to the second quarter of 2015, and closed loan production volume increased 47% sequentially and 12% compared to the second quarter of 2015.

Mortgage servicing income was $52 million for the current quarter, compared to $62 million in the prior quarter and $30 million in the second quarter of 2015.  The $10 million decrease from the prior quarter was driven primarily by higher servicing asset decay, arising from increased prepayments.  The $22 million increase compared to the second quarter of 2015 was due largely to higher servicing fees, improved net hedge performance, and lower servicing asset decay in the current quarter.  The servicing portfolio was $154.5 billion at June 30, 2016, compared to $145.5 billion at June 30, 2015.

Trust and investment management income was $75 million for both the current quarter and prior quarter, and $84 million in the second quarter of 2015.  The $9 million decrease compared to the prior year quarter was primarily due to a decline in assets under management.

Client transaction-related fees (namely service charges on deposits, other charges and fees, and card fees) increased $25 million compared to the prior quarter and $10 million compared to the second quarter of 2015 due to increased client activity.

Other noninterest income was $75 million for the current quarter, compared to $38 million in the prior quarter and $52 million in the second quarter of 2015.  The $37 million increase compared to the prior quarter and $23 million increase compared to the second quarter of 2015 was primarily due to the $44 million in net asset-related gains recognized in the current quarter.

For the six months ended June 30, 2016, noninterest income was $1.7 billion, a decrease of $12 million compared to the first six months of 2015 as higher mortgage-related income was offset by declines across other fee income categories.

Noninterest Expense

Noninterest expense was $1.3 billion in the current quarter, an increase of $27 million and $17 million compared to the prior quarter and the second quarter of 2015, respectively.  The sequential and year-over-year increase was primarily due to $21 million in discrete charges related to ongoing efficiency initiatives recorded in the second quarter of 2016.

Employee compensation and benefits expense was $763 million in the current quarter, compared to $774 million in the prior quarter and $756 million in the second quarter of 2015.  The sequential decrease of $11 million was due to the seasonal decrease in employee benefits and FICA taxes, partially offset by higher salaries and incentive compensation related to improved business performance.  The $7 million increase from the second quarter of 2015 was largely due to higher salaries and incentive compensation.

Operating losses were $25 million in the current quarter, compared to $24 million in the prior quarter and $16 million in the second quarter of 2015.  The $9 million increase compared to the prior year was primarily due to the recovery of previously recorded mortgage-related losses during the second quarter of 2015.

Outside processing and software expense was $202 million in the current quarter, compared to $198 million in the prior quarter and $204 million in the second quarter of 2015.  The sequential increase of $4 million was primarily due to higher business activity levels.

FDIC premium and regulatory expense was $44 million in the current quarter, compared to $36 million in the prior quarter and $35 million in the second quarter of 2015.  The increase compared to both prior periods was driven primarily by higher FDIC assessment fees as a result of deposit growth and higher assessment rates.

Marketing and customer development expense was $38 million in the current quarter, compared to $44 million in the prior quarter and $34 million in the second quarter of 2015.  The sequential decline was due to higher advertising expenses in the first quarter of 2016 associated with our campaign to further advance the Company's purpose, while the increase over the second quarter of 2015 was due largely to the aforementioned marketing campaign.

Net occupancy expense was $78 million in the current quarter, compared to $85 million in both the prior quarter and the second quarter of 2015. The $7 million decline compared to both periods was due to the recognition of previously deferred sale leaseback gains as a result of a reduction in our usage of leased office space.

Other noninterest expense was $142 million in the current quarter, compared to $107 million in the prior quarter, and $149 million in the second quarter of 2015.  The $35 million increase compared to the prior quarter was primarily driven by discrete costs associated with ongoing efficiency initiatives, higher consulting and legal fees, and an increase in credit-related expenses associated with higher loan production volume. The $7 million decrease compared to the second quarter of 2015 was driven primarily by debt extinguishment costs recognized in the second quarter of 2015.

For the six months ended June 30, 2016, noninterest expense was $2.7 billion compared to $2.6 billion for the first six months of 2015.  The $55 million increase was driven by higher employee compensation expense, marketing and customer development expense, and higher operating losses (due to discrete recoveries which were recorded during the first half of 2015).

Income Taxes

For the current quarter, the Company recorded an income tax provision of $201 million, compared to $195 million for the prior quarter and $202 million for the second quarter of 2015.  The effective tax rate for the current quarter was 29%, compared to 30% in the prior quarter and 29% in the second quarter of 2015.  The effective tax rates in the current quarter and the second quarter of 2015 were favorably impacted by $9 million and $15 million, respectively, in net discrete income tax items.

Balance Sheet

At June 30, 2016, the Company had total assets of $199.1 billion and total shareholders' equity of $24.5 billion, representing 12% of total assets.  Book value per share was $46.14 and tangible book value per share was $33.98, both up 3% compared to March 31, 2016, driven by growth in retained earnings and an increase in accumulated other comprehensive income driven by the decline in long-term interest rates towards the end of the quarter.

Loans

Average performing loans were $140.3 billion for the current quarter, a 2% increase over the prior quarter and a 6% increase over the second quarter of 2015. Sequential growth in average consumer loans, C&I loans, nonguaranteed residential mortgages, and commercial construction loans of $1.2 billion, $860 million, $696 million, and $357 million, respectively, was partially offset by a $385 million decline in home equity products. Year-over-year growth was concentrated in the same loan categories as those described above for the sequential quarter.

Deposits

Average consumer and commercial deposits for the current quarter were $154.2 billion, a 3% increase over the prior quarter and an 8% increase compared to the second quarter of 2015.  Average client deposits in the second quarter of 2016 were positively impacted by $2.2 billion related to a temporary corporate client escrow deposit. The increase compared to the second quarter of 2015 was driven by growth in both NOW and money market account balances, partially offset by a 5% 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 9.8% at June 30, 2016, and 9.7% on a fully phased-in basis.  The ratios of average total equity to average total assets and tangible common equity to tangible assets were 12.11% and 8.84%, respectively, at June 30, 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.

During the second quarter, the Company declared a common stock dividend of $0.24 per common share and repurchased $175 million of its outstanding common stock, which completed the authorized repurchase of common equity under its 2015 capital plan.

In June 2016, the Company announced that the Federal Reserve had no objections to its 2016 capital plan.  This plan includes the repurchase of up to $960 million of the Company's outstanding common stock between the third quarter of 2016 and the second quarter of 2017.  Additionally, subject to Board approval, the Company intends to increase its quarterly common stock dividend 8% to $0.26 per common share beginning in the third quarter of 2016 and to maintain the current level of dividend payments on its preferred stock.

Asset Quality

Total nonperforming assets were $1.0 billion at June 30, 2016, down $34 million compared to the prior quarter and up $344 million compared to the second quarter of 2015.  The sequential reduction in nonperforming assets was primarily due to the resolution of certain energy-related loans, while the increase compared to June 30, 2015, was primarily due to downgrades of energy-related loans.  At June 30, 2016, the ratio of nonperforming loans to total loans was 0.67%, compared to 0.70% at March 31, 2016, and 0.36% at June 30, 2015.  Other real estate owned totaled $49 million, a 6% decrease from the prior quarter and a 32% decrease from the second quarter of 2015.

Net charge-offs were $137 million during the current quarter, an increase of $52 million and $50 million compared to the prior quarter and the second quarter of 2015, respectively, and included $70 million in energy-related net charge-offs. The ratio of annualized net charge-offs to total average loans was 0.39% during the current quarter, compared to 0.25% during the prior quarter and 0.26% during the second quarter of 2015.  The provision for credit losses was $146 million in the current quarter, an increase of $45 million and $120 million compared to the prior quarter and the second quarter of 2015, respectively.  The sequential and year-over-year increase in the provision for credit losses was primarily due to higher energy-related charge-offs, moderating asset quality improvements, and loan growth.

At June 30, 2016, the allowance for loan and lease losses was $1.8 billion, which represented 1.25% of total loans, an increase of $4 million from March 31, 2016.  Excluding government-guaranteed and fair value loans, the allowance for loan and lease losses to period-end loans ratio was 1.31% as of June 30, 2016.

Early stage delinquencies declined 9 basis points from the prior quarter to 0.58% at June 30, 2016.  Excluding government-guaranteed loans, early stage delinquencies were 0.23%, down 6 basis points from the prior quarter and down 2 basis points compared to a year ago.

Accruing restructured loans totaled $2.5 billion and nonaccruing restructured loans totaled $307 million at June 30, 2016, of which $2.6 billion were residential loans, $127 million were consumer loans, and $106 million were commercial loans.  Nonaccruing restructured loans have increased $131 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 workout program. At June 30, 2016, substantially all of these nonaccruing restructured home equity loans were current with respect to payments and the vast majority 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 June 30, 2016, SunTrust had total assets of $199 billion and total deposits of $153 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-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 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 July 22, 2016, 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: 2Q16). Individuals calling from outside the United States should dial 1-517-308-9091 (Passcode: 2Q16).  A replay of the call will be available approximately one hour after the call ends on July 22, 2016, and will remain available until August 22, 2016, by dialing 1-888-568-0514 (domestic) or 1-402-530-8003 (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 July 22, 2016, 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 13.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE SunTrust Banks, Inc.