SunTrust Banks, Inc. today reported net income available to common shareholders of $270 million, or $0.50 per average common share, for the second quarter of 2012.  Earnings per average common share increased by $0.04 from the first quarter of 2012 and by $0.17 from the second quarter of 2011.  For the first half of 2012, SunTrust earned $0.96 per share compared to $0.41 per share earned in the same period last year.

"We delivered another quarter of improved results marked by solid noninterest income growth and increased average performing loan balances, which were up nearly $10 billion from the second quarter of last year," said William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc.  "We remain focused on executing our strategies to drive better core performance and efficiency across the organization."

Second Quarter 2012 Financial Highlights

Income Statement

• Continued improvement in core business fundamentals helped drive net income available to common shareholders of$270 million.  
• Revenue grew 1% and 2% compared to the prior quarter and the second quarter of 2011, respectively. 
• Net interest income declined 3%, and the net interest margin declined ten basis points compared to the first quarter of 2012,  primarily as a result of the anticipated reduction in swap-related interest income.  Compared to the second quarter of 2011, net interest income increased 2% primarily due to higher loan balances and favorable trends in deposit mix and pricing.
• Noninterest income increased 7% and 3% compared to the prior quarter and the second quarter of 2011, respectively, due primarily to higher mortgage production income as strong production volumes continued  through the quarter. 
• Noninterest expense was relatively unchanged from the prior quarter and the second quarter of  2011.  The current quarter included a $13 million non-cash debt extinguishment charge related to the previously announced redemption of higher cost trust preferred securities.

Balance Sheet

• As a result of targeted loan growth, average performing loans increased $1.1 billion over the prior quarter and $9.7 billioncompared to the second quarter of 2011, while certain real estate-related loan portfolios continued to decline.
• Average client deposits remained steady at the record levels achieved in the prior quarter, and favorable mix trends continued.  Average demand deposits increased 3% and 23% on a sequential quarter and prior year basis, respectively.

Capital

• Estimated capital ratios continue to be well above current regulatory requirements.  The Tier 1 common equity ratio increased to 9.40%. 
• In its revised capital plan submission in conjunction with the 2012 CCAR process, the Company elected to not request any incremental return of capital due to the close proximity of the resubmission to the 2013 CCAR process, which is expected to commence in the fourth quarter of 2012.

Asset Quality

• Improvement in all primary credit metrics:

  • Net charge-offs declined 17% compared with the prior quarter; the annualized net charge-off ratio was 1.14%, lower by 24 basis points compared to the prior quarter and 62 basis points lower than the second quarter of 2011.

  • Nonperforming loans declined 7% sequentially and were 1.97% of total loans as of quarter end compared to 3.14% a year ago.

  • Early stage delinquencies declined seven basis points sequentially as a result of improvements in the residential loan portfolio.

• Provision for credit losses declined 5% and 23% compared to the prior quarter and second quarter of 2011, respectively.  The allowance for loan losses was $2.3 billion, or 1.85% of total loans. 

(1)  Current period Tier 1 capital and Tier 1 common equity ratios are estimated as of the date of this news release and include the effect of the trust preferred securities redemption on July 11, 2012. 

Consolidated Financial Performance Details

(Presented on a fully taxable-equivalent basis unless otherwise noted)

Revenue

Total revenue was $2.2 billion for the second quarter of 2012, an increase of $28 million from the prior quarter and $48 millionhigher than the second quarter of 2011.  Net gains from the sales of securities were $14 million for the second quarter of 2012 compared to $18 million for the first quarter of 2012 and $32 million for the second quarter of 2011.  Excluding net securities gains, total revenue increased 1% and 3% compared to the first quarter of 2012 and second quarter of 2011, respectively.  The increase in revenue was predominantly due to higher mortgage-related revenue.

For the six months ended June 30, 2012, total revenue, excluding securities gains and losses, was $4.4 billion, up 4% over the first six months of 2011.  The increase was driven by higher mortgage-related revenue and higher net interest income, partially offset by a decline in card fees.

Net Interest Income

For the second quarter of 2012, net interest income was $1,306 million compared to $1,342 million for the prior quarter and$1,286 million for the second quarter of 2011.  The 3% decline from the first quarter of 2012 was largely driven by the reduction in income derived from previously terminated interest rate swaps utilized to manage interest rate risk on commercial loans.  The 2% increase in net interest income compared to the second quarter of 2011 was due to higher average loan balances, the favorable shift in the deposit mix toward lower-cost accounts, and lower rates paid on interest-bearing deposits and long-term debt, which was partially offset by lower yields on average earning assets. 

Net interest margin for the second quarter of 2012 was 3.39%, a decline of 10 basis points from the first quarter of 2012 and a decline of 14 basis points from the second quarter of 2011.  On a sequential quarter basis, the decline was primarily driven by the reduction in swap income, which was the primary contributor to the 11 basis point decline in earning assets yields, while rates paid on interest-bearing liabilities remained relatively stable. Compared to the second quarter of 2011, the decline in the net interest margin was primarily due to a 40 basis point decline in loan yields, the result of the continued low interest rate environment.  The decline in loan yields was partially offset by a 24 basis point decline in interest-bearing liabilities due to lower rates paid on deposits, primarily due to the shift towards lower-cost accounts, and lower long-term debt rates.

For the six months ended June 30, 2012, net interest income was $2,648 million in 2012 compared to $2,563 million in 2011, an increase of  $85 million, or 3%.  Net interest margin was 3.44% in 2012 compared to 3.53% in 2011.  The primary drivers of the increase in net interest income and the decline in net interest margin are consistent with those described in the quarterly comparisons.

Noninterest Income

Total noninterest income was $940 million for the second quarter of 2012 compared to $876 million for the first quarter of 2012 and $912 million for the second quarter of 2011.  The $64 million sequential quarter increase was driven by higher mortgage production-related revenue and increases in multiple other consumer and commercial noninterest income categories, partially offset by lower mortgage servicing revenue.  The increase of $28 million over the second quarter of 2011 was attributable to higher mortgage production-related revenue and higher trading income, partially offset by lower securities gains, investment banking income, and card fees.

Mortgage production income was $103 million for the second quarter of 2012, compared to $63 million for the first quarter of 2012 and $4 million for the second quarter of 2011.  The $40 million sequential quarter increase was predominantly driven by$18 million in net gains from the sale of government guaranteed mortgages and a $20 million decrease in the mortgage repurchase provision.  As of June 30, 2012, the reserve for mortgage repurchases totaled $434 million, an increase of $51 million from the prior quarter.  The reserve increased due to the continued relatively high level of repurchase demands received during the quarter and the timing of demand resolution.  Compared to the second quarter of 2011, mortgage production income increased $99 million, primarily due to higher loan production and increased gain on sale margins, partially offset by a $65 million increase in the mortgage repurchase provision.  Mortgage loan production volume increased 8% on a sequential quarter basis due to an increase in home purchase activity.  Production volume increased 76% over the second quarter of 2011 due to the low mortgage interest rate environment and the HARP 2.0 program.   

Mortgage servicing income was $70 million for the second quarter of 2012 compared to $81 million for the prior quarter and $72 million for the second quarter of 2011.  The $11 million sequential quarter decline was due to less favorable hedge performance than in the prior quarter. The mortgage servicing portfolio was $153 billion at the end of the second quarter of 2012 compared to$163 billion at June 30, 2011.

Card fees were $66 million for the second quarter of 2012, compared to $61 million for the prior quarter and $105 million for the second quarter of 2011.  The 8% sequential quarter increase was due to increased transaction volume, while the 37% decline from the prior year was the result of regulations on debit card interchange fees that became effective at the beginning of the fourth quarter of 2011.

Investment banking income was $75 million for the second quarter of 2012 compared to $71 million for the prior quarter and$95 million for the second quarter of 2011.  The sequential quarter increase was due to higher bond origination fees, partially offset by lower  syndicated finance fees.  The decline relative to the second quarter of 2011 was attributable to lower syndicated finance fee income, partially offset by increased bond origination and M&A transaction fee income.

Trading  income was $70 million for the second quarter of 2012 compared to $57 million for the prior quarter and $53 million for the second quarter of 2011.  The $13 million sequential quarter increase was primarily attributable to a $20 million decline in mark-to-market losses on the Company's fair value debt and index-linked CDs during the current quarter.  The $17 millionincrease in trading income compared to the second quarter of 2011 was largely driven by higher core trading income due to improved market conditions. 

For the six months ended June 30, 2012, noninterest income was $1,816 million in 2012 and $1,795 million in 2011.  The $21 million, or 1%, increase was primarily driven by higher mortgage-related income, partially offset by lower securities gains and lower card fees. 

Noninterest Expense

Noninterest expense was $1,546 million for the second quarter of 2012 and was relatively flat compared to $1,541 million for the first quarter of 2012 and $1,542 million for the second quarter of 2011.  On a sequential quarter basis, the seasonal decline in employee benefits expense was offset by increases in credit-related and other operating expenses, as well as $13 million in non-cash charges associated with the previously announced redemption of higher cost trust preferred securities.  Compared to the second quarter of 2011, increases in personnel costs, outside processing expenses, and the aforementioned debt extinguishment loss were offset by decreases in FDIC assessment premiums, marketing expenses, and credit-related expenses. As of the end of the current quarter, $250 million in annualized expenses had been eliminated from the Company's expense base through the Playbook for Profitable Growth program, compared to the $300 million goal expected to be achieved by year end 2013. 

Employee compensation and benefits expense declined $35 million from the prior quarter, primarily attributable to seasonally higher 401(k) and payroll taxes in the prior quarter.  The $14 million, or 2%, increase in employee compensation and benefits expense compared to the second quarter of 2011 was due to improved business performance and modest annual merit increases.

Credit-related expenses, which are included in other noninterest expense and comprised of other real estate-related expenses and credit and collection costs, increased $7 million on a sequential quarter basis due to accruals for anticipated tax and insurance payments on delinquent mortgage loans.  Credit-related expenses declined $11 million compared to the second quarter of 2011 due to lower losses recognized on OREO during the current quarter.

Operating losses increased by $9 million and $7 million from the prior quarter and the second quarter of 2011, respectively.  The increase in both periods was driven by litigation-related expenses as well as operating losses associated with mortgage-related activities. 

Compared to the second quarter of 2011, FDIC premiums and regulatory assessments declined $21 million, and marketing and customer development declined $14 million due to reduced advertising spending.    

For the six months ended June 30, 2012, noninterest expense was $3.1 billion compared to $3.0 billion in 2011.  The $80 million, or 3%, increase was due to increases in: employee compensation, largely driven by improved business performance, operating losses associated primarily with mortgage-related activities, and outside processing and software costs.  These increases were partially offset by declines in marketing and customer development expenses and a decline in FDIC premiums and regulatory assessments.

Income Taxes

For the second quarter of 2012, the Company recorded an income tax provision of $91 million compared to $69 million for the first quarter of 2012 and $58 million for the second quarter of 2011.  The effective tax rate was 25% for the second quarter of 2012 compared to 22% for the first quarter of 2012 and 24% for the second quarter of 2011.  The effective tax rate for each quarterly period was primarily the result of positive pre-tax earnings adjusted for net favorable permanent tax items, such as interest income from lending to tax-exempt entities and federal tax credits from community reinvestment activities. 

U.S. Treasury Preferred Dividends

The Company formerly paid dividends to the U.S. Treasury on its $4.85 billion of TARP preferred securities through the first quarter of 2011.  The Company redeemed these shares at the end of the first quarter of 2011 and, therefore, did not pay such dividends during 2012 or the last three quarters of 2011.  The six months ended June 30, 2011 included $66 million of preferred dividends paid to the U.S. Treasury and a $74 million, or $0.14 per common share, non-cash charge related to the unamortized discount that was recognized upon the redemption of the TARP preferred shares.

Balance Sheet

As of June 30, 2012, the Company had total assets of $178.3 billion and shareholders' equity of $20.6 billion, representing 11.5% of total assets.  Both book value and tangible book value per common share increased during the quarter and were$37.69 and $26.02, respectively, as of June 30, 2012.

Loans

Average loans for the second quarter of 2012 were $123.4 billion, compared to average loans of $122.5 billion and $114.9 billion during the first quarter of 2012 and second quarter of 2011, respectively.  On a sequential quarter basis, the $0.8 billion, or 1%, growth was concentrated in commercial & industrial loans, which increased $1.3 billion, and high credit quality, non-guaranteed mortgage loans, which increased $761 million.  This was partially offset by a decrease of $625 million in government-guaranteed mortgage loans, primarily due to the sale of approximately $500 million of such loans that occurred during the current quarter.  Average loans increased $8.4 billion, or 7%, over the second quarter of 2011.  Growth was driven by targeted loan categories, including commercial & industrial and government-guaranteed student and residential mortgage loans, which increased by $10 billion combined, while certain real estate-related loan categories were managed down.  The reduction in real estate-related loans, together with an increase in government-guaranteed loans, resulted in improvement in the risk profile of the loan portfolio.  As of June 30, 2012, 10% of the Company's loan portfolio was comprised of government-guaranteed loans, up from 8% at the end of the second quarter of 2011. 

Deposits

Average consumer and commercial deposits for the second quarter of 2012 were $125.9 billion compared to $125.8 billion and$121.9 billion for the first quarter of 2012 and second quarter of 2011, respectively.  The favorable shift in the deposit mix toward lower cost accounts continued during the quarter, with a $1.2 billion, or 3%, increase in demand deposits and a $0.3 billion, or 6%, increase in savings accounts.  These were largely offset by a $650 million, or 4%, decline in time deposits and a$539 million, or 1%, decline in money market account deposits. 

Compared to the second quarter of 2011, average consumer and commercial deposits increased $4.0 billion, or 3%. Average demand deposits increased $6.8 billion, or 23%, and savings accounts increased $0.6 billion, or 13%.  Time deposits declined$2.7 billion, or 14%, and money market account deposits declined $0.9 billion, or 2%. 

Capital and Liquidity

The Company's estimated capital ratios are well above regulatory requirements with Tier 1 capital and Tier 1 common ratios estimated at 10.15% and 9.40%, respectively.  The Company redeemed $38 million of trust preferred securities during the second quarter and also announced plans to redeem an additional $1.2 billion, which it subsequently completed in July.  As a result of the announcement of these redemptions, these instruments no longer qualified for Tier 1 capital as of the end of the second quarter, which accounted for 90 basis points of the decline in the estimated Tier 1 capital ratio from the prior quarter.  The ratios of total average equity to total average assets and tangible equity to tangible assets were 11.51% and 8.31%, respectively, as of June 30, 2012. 

The aforementioned trust preferred securities redemptions were included as part of the Company's capital plan submitted to the Federal Reserve in January 2012 in conjunction with the Comprehensive Capital Assessment Review (CCAR) process.  Upon completing its review of the Company's capital plan in March 2012, the Federal Reserve did not object to the trust preferred redemptions or to the Company retaining its current common stock dividend.  Because the Federal Reserve objected to other proposed capital actions, the Company was required to submit a revised capital plan, which it did in June 2012.  In the revised submission, the Company elected to not request an increase in the current level of its common dividend or any other return of capital, due to the close proximity of the resubmission to the 2013 CCAR process, which is expected to commence in the fourth quarter of 2012 and will provide the Company an opportunity to consider future capital deployment alternatives. 

The Company continues to have substantial available liquidity provided in the form of its client deposit base and other available funding resources, as well as the portfolio of cash and high-quality government-backed securities. 

Asset Quality

Asset quality continued to improve during the quarter, with declines in early-stage delinquencies, net charge-offs, nonperforming loans, and nonperforming assets. 

Nonperforming loans declined again this quarter and totaled $2.5 billion as of June 30, 2012.  Relative to the first quarter of 2012, the $191 million, or 7%, decline occurred across all loan categories, most prominently in commercial construction, residential construction, and commercial real estate loans.  During the second quarter, the Company sold the nonperforming residential loans that were moved to held for sale during the prior quarter; the sales price was similar to the carrying value of these loans as of March 31, 2012.  Compared to June 30, 2011, nonperforming loans declined $1.2 billion, or 32%, with declines across all loan categories, most significantly in commercial loans and non-guaranteed mortgages.  At the end of the second quarter of 2012, the percentage of nonperforming loans to total loans was 1.97%, down by 19 and 117 basis points from the first quarter of 2012 and second quarter of 2011, respectively.  Other real estate owned totaled $331 million at the end of the current quarter, down 19% on a sequential quarter basis and down 31% since June 30, 2011. 

Net charge-offs were $350 million in the current quarter compared to $422 million for the prior quarter and $505 million for the second quarter of 2011.  The sequential quarter decline was largely driven by nonguaranteed mortgages, home equity, and commercial real estate.  The prior year decline was widespread across loan categories, most notably in commercial & industrial, commercial construction, and home equity.  The ratio of annualized net charge-offs to total average loans was 1.14%, a reduction of 24 basis points and 62 basis points from the first quarter of 2012 and second quarter of 2011, respectively.  The provision for credit losses was $300 million, down by $17 million and $92 million from the prior quarter and the second quarter of 2011, respectively.

As of June 30, 2012, the allowance for loan losses was $2.3 billion and represented 1.85% of total loans, down seven basis points from March 31, 2012.  The $48 million decline in the allowance for loan losses during the second quarter of 2012 was reflective of the continued improvement in asset quality, partially offset by growth in the loan portfolio.

Early stage delinquencies decreased seven basis points to 0.97% from the end of the first quarter of 2012. The decline was primarily due to improvement in the residential portfolio, driven by non-guaranteed residential mortgages, home equity products, and construction loans.  Excluding government-guaranteed loans, early stage delinquencies were 0.51%, a decline of eight basis points from March 31, 2012.

Accruing restructured loans totaled $2.7 billion, and nonaccruing restructured loans totaled $0.7 billion as of June 30, 2012, both declining modestly from the prior quarter.   $3.0 billion of restructured loans related to residential loans, while $0.3 billionwere commercial loans.