SunTrust Banks, Inc. today reported net income available to common shareholders of $365 million, or $0.68 per average common diluted share, for the second quarter of 2013.  This compares to earnings per share of $0.63 in the prior quarter and $0.50per share in the second quarter of 2012.  For the first half of 2013, earnings per diluted share was$1.31, or 36% higher than the first half of 2012.

"Earnings growth was driven most notably by the ongoing improvement in credit quality, in addition to a ten percent decrease in noninterest expense from last year," said William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc.  "Improving economic conditions are now starting to create a more favorable operating environment, particularly in our markets, and we remain focused on executing against our strategic priorities to help generate future opportunities for SunTrust." 

Second Quarter 2013 Financial Highlights

Income Statement

• Net income available to common shareholders was $365 million, or $0.68 per average common diluted share, up 8% compared to the prior quarter and 36% compared to the second quarter of last year.
• Lower earning asset yields resulted in declines in net interest income of 1% compared to the prior quarter and 5% compared to the second quarter of last year, as well as net interest margin compression of 8 basis points and 14 basis points, respectively.
• Noninterest income decreased slightly compared to the prior quarter due to lower mortgage-related revenue, which was almost entirely offset by broad-based increases in other noninterest income categories, including investment banking income and wealth management-related fees.
• Noninterest expense increased 2% compared to the prior quarter primarily due to an increase in certain cyclically high costs, while core operating expenses declined.  Noninterest expense decreased 10% compared to the second quarter of last year due to ongoing efficiency initiatives, as well as the abatement of cyclically high costs.

Balance Sheet

• Average loans were up modestly compared to the prior quarter, and the ongoing diversification of the loan portfolio continued, with increases in C&I and commercial real estate loans.  Average loans declined 2% compared to the second quarter of last year, driven by the sales of government guaranteed student and residential loans, which were partially offset by targeted growth in C&I loans.   
• Average client deposits declined 1% on a sequential quarter basis but increased 1% compared to the second quarter of last year.  The decline from the prior quarter was driven by decreases in money market and time deposit account balances.  The increase compared to last year was driven by demand deposit and NOW account growth, partially offset by the continued shift out of higher cost time deposits.

Capital

• Estimated capital ratios continued to be well above regulatory requirements. The Tier 1 common equity ratio increased to an estimated 10.15%, up from 10.13% at March 31.     
• During the quarter, the Company repurchased $50 million of its common shares in conjunction with its capital plans announced last quarter. Additionally, the Company paid a $0.10 per share common stock dividend, up $0.05 per share from the first quarter. 

Asset Quality

• The risk profile of the balance sheet continued to improve. Nonperforming loans decreased 22% during the quarter and were 0.94% of total loans at June 30, 2013, compared to 1.21% last quarter and 1.97% for the second quarter of last year.
• Annualized net charge-offs decreased to 0.59% of average loans compared to 0.76% and 1.14% in the prior quarter and the second quarter of last year, respectively.
• Current quarter nonperforming loans and net charge-offs were at their lowest levels in over five years.
• The provision for credit losses declined 31% compared to the prior quarter and 51% compared to the second quarter of last year.

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

Revenue

Total revenue was $2.1 billion for the second quarter, a decrease of $14 million, or 1%, compared to the prior quarter. The decline was primarily driven by lower mortgage-related and net interest income, partially offset by broad-based increases in other noninterest income categories, particularly investment banking and wealth management-related revenue. Total revenue compared to the second quarter of last year decreased $146 million, or 7%, due primarily to lower net interest income, mortgage-related revenue, and trading income, which were partially offset by a reduction in the mortgage repurchase provision.

For the six months ended June 30, 2013, total revenue, excluding securities gains, was $4.2 billion, down 5% compared to the first six months of 2012.  The decline was driven by the same factors described in the year-over-year comparison above.

Net Interest Income

Net interest income was $1.2 billion for the current quarter, a decrease of $9 million from the prior quarter due to lower commercial loan-related swap income, partially offset by one additional day in the current quarter and higher average earning asset balances. Net interest income decreased $64 million compared to the second quarter of last year.  The decline was driven by lower earning asset yields, a decrease in commercial loan-related swap income, and the foregone dividend income related to the third quarter of 2012 accelerated termination of the agreements regarding the shares formerly owned in The Coca-Cola Company.  Partially offsetting these declines in interest income was lower interest expense due to decreases in deposit rates, a reduction in long-term debt, and a favorable deposit mix shift.

As anticipated, the net interest margin for the second quarter decreased to 3.25%, an 8 and 14 basis point decline from the prior quarter and the second quarter of last year, respectively.  Earning asset yields declined 9 basis points on a sequential quarter basis as a result of the continued low interest rate environment and the impact of the decline in commercial loan swap income.  The decrease in earning asset yields was partially offset by a 2 basis points reduction in interest-bearing liability costs due to a modest decrease in deposit rates. The net interest margin decline from the second quarter of last year was primarily due to a 30 basis point decrease in loan yields, driven by the continued low interest rate environment and a decrease in commercial loan-related swap income, as well as a 67 basis point decrease in the yield on the investment securities portfolio, approximately 26 basis points of which was due to the forgone dividend income associated with The Coca-Cola Company stock.  Partially offsetting the declines in earning asset yields was a 26 basis point reduction in rates paid on interest-bearing liabilities, primarily related to time deposits and long-term debt.

For the six months ended June 30, 2013, net interest income was $2.5 billion, a decrease of $155 million, or 6%, compared to the first half of 2012.  The net interest margin was 3.29% in 2013 compared to 3.44% 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.

Noninterest Income

Total noninterest income was $858 million for the current quarter compared to $863 million for the prior quarter and $940 million for the second quarter of last year.  On a sequential quarter basis, the $5 million decrease was due to lower mortgage-related income, which was adversely impacted by the increase in interest rates during the current quarter, but was almost entirely offset by broad-based increases in other noninterest income categories.  Compared to the second quarter of last year, the$82 million decrease was primarily driven by declines in mortgage-related income, trading income, and securities gains, which were partially offset by a reduction in the mortgage repurchase provision. 

Mortgage production income for the current quarter was $133 million compared to $159 million for the prior quarter and $103 million for the second quarter of last year.  The $26 million sequential quarter decrease was primarily driven by declines in gain on sale revenue, coincident with the sharp increase in mortgage interest rates in late May and through June.  Closed mortgage production volume was$9.1 billion, an increase of 3% compared to the prior quarter, and the mix of purchase volume increased to 34% in the current quarter from 20% in the prior quarter. Compared to the second quarter of last year, mortgage production income increased $30 million due to the decline in the mortgage repurchase provision, which was largely offset by reduced gain on sale margins.  At June 30, 2013, the reserve for mortgage repurchases totaled $363 million, a decrease of $150 million from the prior quarter.  The pace at which SunTrust and the GSEs are resolving repurchases of older vintage loans continued to increase in the quarter, as evidenced by higher charge-offs and lower pending demands.  Additionally, new full file requests increased in the quarter while new demands declined.    

Mortgage servicing income was $1 million for the current quarter compared to $38 million for the prior quarter and $70 million for the second quarter of last year. The $37 million sequential quarter decrease and the $69 million decline compared to the second quarter of last year were due primarily to reduced net hedging gains.  At June 30, 2013, the servicing portfolio was $140 billion compared to $153 billionat June 30, 2012, with the decline driven by the elevated level of refinance volume and the sale of certain loans in the portfolio. 

Investment banking income was $93 million for the current quarter compared to $68 million in the prior quarter and $75 million in the second quarter of last year. The sequential quarter and year-over-year increases were due to strong growth in loan syndications and increased high yield bond origination activity. 

Trading income was $49 million for the current quarter compared to $42 million for the prior quarter and$70 million for the second quarter of last year.  The $7 million sequential quarter increase was due to an $8 million mark-to-market valuation gain on the Company's fair value debt and index-linked CDs in the current quarter compared to a valuation loss of $24 million in the prior quarter.  This was partially offset by lower core trading income, which was primarily the result of recent market interest rate volatility.  The $21 million decline in trading income compared to the second quarter of last year was largely driven by lower core trading income, partially offset by higher mark-to-market valuation gains on the Company's fair value debt and index-linked CDs in the current quarter.

For the six months ended June 30, 2013, noninterest income was $1.7 billion compared to $1.8 billionin 2012. The $95 million, or 5%, decrease was primarily driven by lower securities gains, mortgage-related revenue and trading  income, partially offset by a lower mortgage repurchase provision.

Noninterest Expense

Noninterest expense was $1.4 billion for the current quarter compared to $1.4 billion for the prior quarter and $1.5 billion for the second quarter of last year. The sequential quarter increase of 2% was primarily due to a specific mortgage-related operating loss and higher collection expenses, partially offset by seasonally lower employee benefits expense.  The $149 million, or 10%, decline from the second quarter of last year was reflective of the Company's continued expense reduction initiatives, as well as the abatement of cyclically high costs, most notably other real estate expenses.   

Employee compensation and benefits expense was $737 million in the current quarter compared to$759 million for the prior quarter and $762 million for the second quarter of the last year. The sequential quarter decrease of $22 million was largely attributable to seasonally lower 401(k) and payroll taxes in the current quarter, partially offset by an increase in compensation expense due to an incentive accrual adjustment related to 2012 bonus payments that impacted the first quarter of 2013, as well as annual merit increases.  The $25 million decrease from the second quarter of last year was primarily due to the reduction in full-time equivalent employees, as well as lower incentive compensation.

Operating losses were $72 million in the current quarter compared to $39 million in the prior quarter and $69 million in the second quarter of last year.  The sequential quarter increase was due to a specific mortgage-related legal matter. 

Compared to the prior quarter and the second quarter of last year, FDIC insurance expense declined$13 million and $19 million, respectively, due to declines in the Company's assessment rate, reflecting the Company's reduced risk profile.  Outside processing and software expenses increased $9 millionand $7 million compared to the prior quarter and the second quarter of last year, respectively, primarily due to technology investments.

Other noninterest expense was $191 million compared to $163 million in the prior quarter and $285 million for the second quarter of last year.  The $28 million increase from the prior quarter was driven by higher collection costs, due to increased resolution of defaulted mortgages. The $94 milliondecrease from the second quarter of last year was primarily due to reductions in other real estate, legal, and consulting expenses.  

For the six months ended June 30, 2013, noninterest expense was $2.8 billion compared to $3.1 billion in 2012. The $327 million, or 11%, decrease was due to the continued focus on efficiency initiatives resulting in declines across most expense categories, as well as the abatement of cyclically high costs.

Income Taxes

For the current quarter,  the Company recorded an income tax provision of $146 million compared to$151 million for the prior quarter and $91 million for the second quarter of last year. The effective tax rate was 28% for the current quarter compared to 30% for the prior quarter and 25% for the second quarter of last year.  The decrease in the effective tax rate from the prior quarter was primarily due to quarterly fluctuations in the forecasted annual effective tax rate, while the effective tax rate increase compared to the second quarter of last year was due to higher pre-tax earnings in the current quarter.

Balance Sheet

At June 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 decreased slightly compared to March 31, 2013, and were $37.65 and $26.08, respectively.  The decreases were primarily attributable to the decline in accumulated other comprehensive income, due to lower unrealized gains in the securities portfolio as a result of the recent increase in market interest rates.

Loans

Average performing loans were $120 billion for the current quarter, an increase of $0.6 billion, or 1%, from the prior quarter driven by growth in C&I and commercial real estate loans, partially offset by a decrease in government guaranteed residential mortgage loans.  Average performing loans decreased$0.8 billion, or 1%, compared to the second quarter of last year.  The decline was due to government guaranteed student and mortgage loans, which decreased $1.9 billion and $2.1 billion, respectively, due to sales during 2012.  Home equity loans also decreased $0.7 billion due to continued loan payoffs.  Partially offsetting these declines were increases in C&I loans of $3.7 billion, or 7%, and consumer indirect loans of $0.8 billion, or 8%. 

Securities Available for Sale

The securities available for sale portfolio for the current quarter averaged $23.8 billion, an increase of$0.5 billion from the prior quarter and a decrease of $2.3 billion from the second quarter of last year.  The increase compared to the prior quarter was primarily the result of increased holdings of mortgage-backed and U.S. Treasury and government agency securities.  The investment portfolio declined from the second quarter of last year due to the The Coca-Cola Company stock transaction executed in the third quarter of 2012, as well as reduced holdings of government agency mortgage-backed securities and asset-backed securities, partially offset by increased holdings of U.S. Treasury and government agency securities.

Deposits

Average consumer and commercial deposits for the current quarter were $126.6 billion compared to$127.7 billion for the prior quarter and $125.9 billion for the second quarter of last year.  The decrease during the current quarter was driven by declines of $1.1 billion, or 3%, in money market deposits,$0.5 billion, or 3%, in time deposits, and $0.4 billion, or  1%, in NOW accounts.  These decreases were predominantly offset by increases of $0.6 billion, or 2%, in demand deposits and $0.3 billion, or 5%, in savings accounts.  The $0.7 billion, or 1%, increase compared to the second quarter of last year was driven by lower-cost deposit growth, as average demand deposits increased $2.1 billion, or 6%, NOW accounts increased $1.1 billion, or 4%, and savings accounts increased $0.6 billion, or 12%.  The growth in these categories was partially offset by a decrease of $3.0 billion, or 17%, in higher-cost 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 remaining relatively stable at an estimated 11.20% and 10.15%, respectively, at June 30, 2013.  The ratios of total average equity to total average assets and tangible equity to tangible assets were 12.33% and 8.95%, respectively, at June 30, 2013, both stable to the prior quarter and higher than the second 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 first quarter, the Company announced capital plans in conjunction with the 2013 CCAR submission and the completion of the Federal Reserve's review of the Company's capital plan.  Pursuant to the capital plan, during the second quarter the Company declared a common stock dividend of $0.10 per common share, up $0.05 per share from the prior quarter and second quarter of last year.  Additionally, during the second quarter the Company repurchased $50 million of common stock, with plans to repurchase up to an additional $150 million of common stock by the end of the first quarter of 2014.

Asset Quality

Asset quality continued to steadily improve during the quarter, 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 $1.1 billion at June 30, 2013, down $326 million, or 22%, relative to the prior quarter, led by declines in residential mortgages and home equity loans.  Contributing to the sequential quarter decline was the return of certain loans to performing status that had been previously discharged from Chapter 7 bankruptcy.  During the fourth quarter of 2012, $232 million of such loans were transferred to nonperforming status to be consistent with recent regulatory guidance.  Since that time, $220 million of these loans have been current on their payments for six months and, as such, were reclassified back to accruing status during the quarter.  Compared to a year ago, nonperforming loans decreased $1.3 billion, or 54%, with reductions across all loan categories, most significantly residential mortgages, commercial real estate, C&I, and commercial construction.  At June 30, 2013, the percentage of nonperforming loans to total loans was 0.94%, down from 1.21% and 1.97% at the end of the prior quarter and second quarter of last year, respectively.  Other real estate owned totaled $198 million at the end of the current quarter, down 11% from the prior quarter and down 40% from a year ago.         

Net charge-offs were $179 million during the current quarter compared to $226 million for the prior quarter and $350 million for the second quarter of last year.  The decreases in net charge-offs from the prior quarter and second quarter of last year were driven primarily by lower residential loan charge-offs.

The ratio of annualized net charge-offs to total average loans was 0.59% for the current quarter, 0.76% for the prior quarter, and 1.14% for the second quarter of last year.  Net charge-offs in the current quarter were at the lowest level since the fourth quarter of 2007.  The provision for credit losses was$146 million, which decreased $66 million and $154 million from the prior quarter and the second quarter of last year, respectively.

At June 30, 2013, the allowance for loan losses was $2.1 billion and represented 1.75% of total loans, down 4 basis points from March 31, 2013.  Excluding government guaranteed loans, the allowance for loan losses was 1.89% of total loans.  The $27 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 seven basis points from the prior quarter to 0.71% at June 30, 2013.  The decrease was primarily due to residential loans.  Excluding government-guaranteed loans, early stage delinquencies were 0.40%, a decrease of one basis point from March 31, 2013.

Accruing restructured loans totaled $2.8 billion, and nonaccruing restructured loans totaled $0.4 billionat June 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. Accruing restructured loans increased$282 million during the quarter, primarily  due to the aforementioned transfer of $220 million of nonperforming Chapter 7 bankruptcy loans to accruing status with a corresponding decrease in nonaccruing restructured loans.