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 Company39;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.