SunTrust Banks, Inc. today reported net income available to common shareholders of $1.1 billion, or $1.98 per average common diluted share, for the third quarter of 2012.  Third quarter results include the impact of previously announced actions to improve the Company's risk profile and strengthen its balance sheet.  Including these transactions, which are outlined below, earnings per average common diluted share increased $1.48 from the second quarter of 2012 and $1.59from the third quarter of 2011.  For the first nine months of 2012, SunTrust earned $2.94 per share compared to $0.81 per share earned in the same period last year.

Third Quarter Impact of Previously Announced Actions to Improve Risk Profile and Strengthen the Balance Sheet

• The acceleration of the termination of agreements regarding shares owned in The Coca-Cola Company("KO") resulted in a pre-tax securities gain of $1.9 billion.  In addition, SunTrust donated one million shares of KO, valued at $38 million, to the SunTrust Foundation which increased noninterest expense. 
• The mortgage repurchase provision of $371 million increased the mortgage repurchase reserve to a level that is expected to cover the estimated losses on loans sold to Government Sponsored Enterprises("GSEs") prior to 2009 and negatively affected noninterest income. 
• The sale of $0.5 billion of nonperforming mortgage and commercial real estate loans increased charge-offs and the loan loss provision by $172 million.
• The movement of $1.4 billion of delinquent and current student loans and $0.5 billion of delinquentGinnie Mae loans to loans held for sale decreased noninterest income by $92 million.        
• Additionally, valuation losses related to the planned sale of $0.2 billion of affordable housing investments resulted in a $96 million increase in noninterest expense. 
• Collectively, these actions contributed $753 million to net income available to common shareholders, or$1.40 per average common share, in the third quarter. 

"This quarter's actions more favorably position the Company for the future.  In addition, we demonstrated another quarter of improved core performance," said William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc. "As we manage through the challenging revenue environment, we remain intensely focused on deepening client relationships and improving efficiency."  Mr. Rogers noted that favorable core performance trends include strong mortgage production income, continued commercial and industrial loan growth, solid noninterest bearing deposit account gains, and a marked decrease in nonperforming loans. 

Third Quarter 2012 Financial Highlights

Income Statement

• The aforementioned actions to reduce risk and strengthen the balance sheet, in addition to continued improvement in core business fundamentals, drove net income to common shareholders of $1.1 billion, or $1.98 per average common diluted share. 
• Revenue increased $1.6 billion from the prior quarter and the third quarter of last year.
  • Noninterest income increased $1.6 billion from the prior quarter and the third quarter of last year, primarily driven by the aforementioned actions to improve the risk profile and strengthen the balance sheet.  Core noninterest income growth was driven by higher mortgage production and investment banking income. 
  • Net interest income decreased $5 million, or 0.4%, from the prior quarter primarily due to the lost dividend income from the KO transaction. Net interest margin declined one basis point, primarily due to the lower dividend income and loan yields, offset by lower deposit rates paid and the redemption of higher cost trust preferred securities.  Net interest income increased $8 million, or 1%, from the third quarter of last year due to higher average loan balances and favorable deposit trends. 
• Noninterest expense increased $180 million from the prior quarter and $166 million from the third quarter of last year primarily due to the loss related to the expected sale of affordable housing investments and the charitable contribution to the SunTrust Foundation.

Balance Sheet

• Average performing loans increased $0.9 billion over the prior quarter and $9.5 billion over the third quarter of last year as targeted loan growth, particularly commercial and industrial loans, more than offset declines in certain real estate-related loan portfolios.    
• Average client deposits declined $0.5 billion, or 0.4%, from the prior quarter, while the favorable shift in the deposit mix toward lower cost accounts continued with a $1.2 billion, or 3%, increase in demand deposits.  Average client deposits were up $2.4 billion over the same quarter last year. 

Capital

• Estimated capital ratios continue to be well above current regulatory requirements.  The Tier 1 common equity ratio increased to an estimated 9.80%, up from 9.40% at the end of the prior quarter.  

Asset Quality

• The overall risk profile of the balance sheet improved due to the disposition of nonperforming and delinquent loans.
• Nonperforming loans declined 30% sequentially and were 1.42% of total loans as of quarter end compared to 2.76% a year ago. 
• Provision for credit losses increased $150 million and $103 million compared to the prior quarter and third quarter of 2011, respectively.  Increases in both periods were a result of incremental charge-offs related to the sale of nonperforming loans and a credit policy change regarding junior lien loans during the third quarter.

 (1)  Current period Tier 1 capital and Tier 1 common equity ratios are estimated as of the date of this news release.

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

Revenue

Total revenue was $3.8 billion for the third quarter of 2012, an increase of $1.6 billion from both the prior quarter and the third quarter of 2011.  Net gains from the sales of securities were $1.9 billion for the third quarter of 2012, substantially all from the sale of KO shares, compared to $14 million for the second quarter of2012 and $2 million for the third quarter of 2011.  Excluding net securities gains, total revenue declined $330 million and $292 million compared to the second quarter of 2012 and third quarter of 2011, respectively.  The decline was primarily related to the actions taken in the third quarter of 2012, which included a higher provision for mortgage repurchases and losses related to the transfer to held for sale of student and mortgage loans.

 For the nine months ended September 30, 2012, total revenue, excluding securities gains and losses, was $6.3 billion, down $121 million compared to the first nine months of 2011.  The decline was driven by the same factors described in the quarterly comparison, as well as a decline in card fees of $126 million.

Net Interest Income

For the third quarter of 2012, net interest income was $1,301 million compared to $1,306 million for the prior quarter and $1,293 million for the third quarter of 2011.  The slight decline from the second quarter of 2012was largely driven by the $15 million of foregone dividend income as a result of the sale of the KO shares, partially offset by one additional day and reduced funding costs in the current quarter.  The 1% increase in net interest income compared to the third quarter of 2011 was due to higher average loan balances and the favorable shift in deposit mix.  

Net interest margin for the third quarter of 2012 was 3.38%, a decline of 1 basis point from the second quarterof 2012 and a decline of 11 basis points from the third quarter of 2011.  On a sequential quarter basis, the decline was primarily driven by the aforementioned decline in KO dividend income and lower loan yields resulting in a 13 basis point decline in earning asset yields.  This decline was largely offset by a 14 basis point reduction in interest-bearing liabilities, due to lower deposit rates and the benefit from redeeming $1.2 billion of higher cost trust preferred securities early in the third quarter. Compared to the third quarter of 2011, the net interest margin decline was primarily due to a 42 basis point decline in loan yields, the result of the continued low interest rate environment, and a decline in commercial loan-related swap income.  This was partially offset by a 33 basis point decline in rates paid on interest-bearing liabilities due to lower rates paid on deposits, primarily due to the shift towards lower-cost accounts, lower long-term debt rates, and a reduction in long-term debt.

For the nine months ended September 30, 2012, net interest income was $3,949 million compared to $3,855 million in 2011, an increase of $94 million, or 2%.  Net interest margin was 3.42% in 2012 compared to 3.52%in 2011.  The primary drivers of the increase in net interest income were growth in average earning assets and a favorable shift in the deposit mix, partially offset by lower yields on earning assets.  The decline in net interest margin was due to lower yields on average earning assets.

Noninterest Income

Total noninterest income was $2,542 million for the third quarter of 2012 compared to $940 million for thesecond quarter of 2012 and $903 million for the third quarter of 2011.  The $1.6 billion increases from both the prior quarter and prior year quarter were primarily driven by $1.9 billion in securities gains, partially offset by a higher mortgage repurchase provision and losses related to the transfer to held for sale of certain student and mortgage loans.

Mortgage production income for the third quarter of 2012 was a loss of $64 million compared to income of$103 million for the second quarter of 2012 and income of $54 million for the third quarter of 2011.  The $167 million sequential quarter decrease was driven by a $216 million increase in the mortgage repurchase provision.  Excluding the third quarter and second quarter 2012 mortgage repurchase provisions of $371 million and $155 million, respectively, mortgage production income increased sequentially by $49 million, driven by strong mortgage production volume and improved margins.  As of September 30, 2012, the reserve for mortgage repurchases totaled $694 million, an increase of $260 million from the prior quarter.  The increase was recorded as a result of recent information received from the GSEs, as well as the Company's recent experience related to full file requests and repurchase demands, which enhanced its ability to estimate losses attributable to the remaining expected demands from defaulted or currently delinquent loans sold to the GSEs prior to 2009.  These vintage loans have comprised the vast majority of mortgage repurchase losses to date; as such, future mortgage repurchase provisions are expected to decline substantially from levels experienced in recent quarters.  Compared to the third quarter of 2011, mortgage production income declined $118 million, due to the $254 million increase in the mortgage repurchase provision, partially offset by higher loan production and increased margins.    

Mortgage servicing income was $64 million for the third quarter of 2012 compared to $70 million for the prior quarter and $58 million for the third quarter of 2011.  The $6 million sequential quarter decline was due to lower servicing fee income.  The $6 million increase from the third quarter of 2011 was due to better hedge performance, partially offset by a decline in servicing fee income, as the mortgage servicing portfolio declined to$150 billion at the end of the third quarter of 2012 compared to $161 billion at September 30, 2011.

Other noninterest income for the third quarter of 2012 was a loss of $31 million versus income of $53 million in both the prior quarter and the third quarter of 2011.  The $84 million declines from the previous quarters were attributable to the aforementioned $92 million loss recognized in the current quarter upon moving certain student and mortgage loans to loans held for sale.

Card fees were $55 million for the third quarter of 2012 compared to $66 million for the prior quarter and $104 million for the third quarter of 2011.  The $11 million sequential quarter decrease was due to the reclassification of credit card rewards costs; these costs were previously recorded as a noninterest expense, but beginning in the third quarter of 2012 they are reflected as a contra-revenue item within card fees. The $49 million, or 47%, decline from the prior year quarter was primarily the result of regulations on debit card interchange fees that became effective at the beginning of the fourth quarter of 2011, as well as the aforementioned reclassification of rewards costs.

Investment banking income was $83 million for the third quarter of 2012 compared to $75 million for the prior quarter and $68 million for the third quarter of 2011.  The sequential quarter increase was due to higher syndicated finance fees.  The increase relative to the third quarter of 2011 was primarily attributable to higher syndicated finance and bond origination fee income.

Trading income was $19 million for the third quarter of 2012 compared to $70 million for the prior quarter and$66 million for the third quarter of 2011.  The $51 million sequential quarter decrease was primarily attributable to a $45 million increase in mark-to-market losses on the Company's fair value debt and index-linked CDs during the current quarter as credit spreads improved.  The $47 million decline in trading income compared to the third quarter of 2011 was largely driven by the increase in mark-to-market losses on the Company's fair value debt and index-linked CDs compared to gains in 2011, partially offset by higher core trading income and a decline in losses related to previously securitized loans.

For the nine months ended September 30, 2012, noninterest income was $4.4 billion compared to $2.7 billionin the same period in 2011.  The $1.7 billion, or 62%, increase was primarily driven by higher securities gains partially offset by lower card fees and losses from the transfer to held for sale of student and mortgage loans described above. 

Noninterest Expense

Noninterest expense was $1,726 million for the third quarter of 2012 compared to $1,546 million for thesecond quarter of 2012 and $1,560 million for the third quarter of 2011.  The sequential quarter increase of$180 million was primarily due to the $96 million loss related to the expected sale of affordable housing investments, the $38 million charitable contribution of the KO shares to the SunTrust Foundation, and $29 million in severance expense.   Compared to the third quarter of 2011, the $166 million increase was due to the aforementioned third quarter of 2012 items and higher personnel expenses, partially offset by declines in FDICassessment premiums.  During the third quarter of 2012, the Company eliminated additional expenses through its Playbook for Profitable Growth ("PPG") program; the total annualized PPG savings now exceed the $300 million goal for the program. 

Employee compensation and benefits expense increased $18 million from the prior quarter, primarily attributable to the accelerated vesting of deferred compensation associated with organizational changes, as well as higher contract labor costs.  The $30 million, or 4%, increase in employee compensation and benefits expense compared to the third quarter of 2011 was also due to the same factors discussed above, as well as higher incentive compensation from improved business performance.  As of September 30, 2012, the Company's total full-time equivalent employees were 28,000, which was 324 employees lower than the prior quarter and 1,483 employees lower than the same quarter last year.

Other noninterest expense was $402 million in the current quarter, an increase of $117 million from the second quarter of 2012 and $93 million from the third quarter of last year.  The increases from the prior periods were primarily due to specific third quarter 2012 actions, including the $96 million loss related to the affordable housing investments,  $29 million in severance expense, and $17 million in real estate charges as the Company reassessed some of its corporate real estate leases and holdings.  This was partially offset by the reclassification of credit card rewards costs.  Additionally, credit-related expenses, which are comprised of other real estate expenses and credit and collection costs, also declined.  Such expenses fell $18 million and $38 million compared to the second quarter of 2012 and the third quarter of 2011, respectively, primarily due to a decline in losses recognized on OREO.

FDIC premiums and regulatory assessments increased $7 million on a sequential quarter basis and declined$13 million compared to the third quarter of 2011 due to fluctuations in the Company's assessment rate. Outside processing and software declined $9 million on a sequential quarter basis due to a decline in transaction processing expenses and lower software amortization.  Amortization of intangible assets increased$6 million from both the prior quarter and prior year due to the recognition of goodwill impairment associated with a wealth management business.  Losses on debt extinguishment declined by $11 million sequentially, due to the $13 million second quarter 2012 charge related to the redemption of higher cost trust preferred securities.     

For the nine months ended September 30, 2012, noninterest expense was $4,813 million compared to $4,567 million in 2011.  The $246 million, or 5%, increase was primarily due to the third quarter 2012 actions as described in the quarterly comparisons above.  Additionally, higher employee compensation, outside processing and software, and operating losses were partially offset by declines in OREO expenses and FDICinsurance premiums and regulatory assessments.

Income Taxes

For the third quarter of 2012, the Company recorded an income tax provision of $551 million compared to $91 million for the second quarter of 2012 and $45 million in the third quarter of 2011.  The effective tax rate was34% for the third quarter of 2012 compared to 25% for the second quarter of 2012 and 17% for the third quarter of 2011.  The increase in the effective tax rate for the third quarter of 2012 was primarily due to higher pre-tax earnings. 

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 nine months ended September 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 September 30, 2012, the Company had total assets of $173.2 billion and shareholders' equity of $20.4 billion, representing 12% of total assets.  Both book value and tangible book value per common share remained relatively stable to the prior quarter and were $37.35 and $25.72, respectively, as of September 30, 2012.

Loans

Average loans for the third quarter of 2012 were $124.1 billion compared to average loans of $123.4 billion and$115.6 billion during the second quarter of 2012 and third quarter of 2011, respectively.  On a sequential quarter basis, the $0.7 billion, or 1%, growth was concentrated in commercial and industrial loans, which increased $1.1 billion, and consumer indirect loans, which increased $0.3 billion.  Partially offsetting the growth were decreases of $0.4 billion in government-guaranteed mortgage loans, primarily due to the sale of approximately $0.5 billion of such loans during the second quarter, $0.2 billion in home equity loans, and $0.2 billion in nonaccrual loans. 

Average loans increased $8.4 billion, or 7%, over the third quarter of 2011.  Growth was primarily driven by commercial and industrial, which increased $5.7 billion, or 12%, as well as government-guaranteed student and residential mortgage loans, up a combined $3.5 billion.  Additionally, high credit-quality nonguaranteed residential loans and indirect loans increased by $1.0 billion and $0.8 billion, respectively.  Partially offsetting these areas of loan growth were declines in certain real estate-related loan categories that were actively managed down.  The reduction in certain real estate-related loans, together with an increase in government-guaranteed loans, has resulted in an improvement in the risk profile of the loan portfolio compared to a year ago.

Loan balances at quarter end for the third quarter of 2012 were $121.8 billion, as compared to $124.6 billion in the prior quarter and $117.5 billion last year.  The sequential quarter decline of $2.7 billion was attributable to the aforementioned sales, or transfers to loans held for sale, during the third quarter of 2012 of:

• $1.4 billion of guaranteed student loans, which were a combination of current and delinquent loans. These loans were included in loans held for sale at quarter end, but $1.0 billion have since been sold, and the remainder is expected to be sold in the fourth quarter.
• $0.5 billion of delinquent guaranteed mortgage loans.  These loans were included in held for sale at quarter end, and the sale is expected to be completed during the fourth quarter.
• $0.5 billion of nonperforming mortgage and CRE loans.  Most of the $447 million of nonperforming mortgage sales were completed during the third quarter, and the residual portion is expected to be completed in the fourth quarter.  Approximately half of the $97 million in nonperforming CRE loans were sold during the quarter, and the remainder is expected to be sold during the fourth quarter.

These declines were partially offset by growth in commercial and industrial loans and consumer direct and indirect loans.  The $4.3 billion of period end loan growth as compared to the prior year was attributable to the same factors as noted in the average balance comparisons above. 

Securities Available for Sale

As of September 30, 2012, the Company's securities available for sale portfolio was $21.5 billion, down $2.9 billion, or 12%, from June 30, 2012 and $6.0 billion, or 22%, from September 30, 2011.  The sequential quarter decline was primarily related to the sale of the KO shares in September.  Additionally, the Company's holdings of mortgage backed securities declined during the quarter as a result of the repayment of principal.  The decline from September 30, 2011 was for the same reasons noted above along with the repositioning of the investment portfolio, which included selling certain low coupon agency mortgage-backed securities.  The yield on the securities portfolio declined 38 basis points sequentially, from 3.16% in the prior quarter to 2.78% in the third quarter of 2012; approximately 30 basis points of the decline was due to the forgone dividend income associated with the KO transaction. 

Deposits

Average consumer and commercial deposits for the third quarter of 2012 were $125.4 billion compared to$125.9 billion and $123.0 billion for the second quarter of 2012 and third 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.  However, this was offset by a $1.2 billion, or 7%, decline in time deposits and a $433 million, or 1%, decline in money market accounts. 

Compared to the third quarter of 2011, average consumer and commercial deposits increased $2.4 billion, or2%. Average demand deposits increased $5.9 billion, or 19%, interest bearing transaction accounts increased$0.8 billion, or 3%, and savings accounts increased $0.6 billion, or 12%.  Time deposits declined $3.4 billion, or 17%, and money market accounts declined $1.6 billion, or 4%. 

Capital and Liquidity

The Company's estimated capital ratios are well above current regulatory requirements with Tier 1 capital and Tier 1 common ratios increasing to an estimated 10.60% and 9.80%, respectively.  The ratios of total average equity to total average assets and tangible equity to tangible assets were 11.76% and 8.48%, respectively, as ofSeptember 30, 2012.  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 its portfolio of cash and high-quality government-backed securities. 

Asset Quality

Asset quality continued to improve during the quarter, with declines in nonperforming loans and nonperforming assets.  Nonperforming loans totaled $1.7 billion as of September 30, 2012, down $727 million, or 30%, relative to the prior quarter.  The primary driver of the decline in nonperforming loans was the sale of certain mortgage and commercial real estate loans.  Specifically, the Company transferred $544 million of nonperforming loans to held for sale during the third quarter.  The majority of the loans were sold during the quarter, and as of September 30, 2012, $40 million of nonperforming loans remain classified as held for sale. Partially offsetting this decline in nonperforming loans was an $81 million increase in nonperforming junior lien loans that were current but subordinate to a first lien loan that was seriously delinquent.  The decision to transfer these current junior liens to nonperforming loans was driven by regulatory guidance issued during 2012.

Compared to September 30, 2011, nonperforming loans declined $1.5 billion, or 47%, with declines across all loan categories, most significantly in commercial real estate and residential loans.  At the end of the third quarter of 2012, the percentage of nonperforming loans to total loans was 1.42%, down from 1.97% and2.76% at the end of the second quarter of 2012 and third quarter of 2011, respectively.  Other real estate owned totaled $304 million at the end of the current quarter, down 8% on a sequential quarter basis and down40% since September 30, 2011. 

Net charge-offs were $511 million in the current quarter compared to $350 million for the prior quarter and$492 million for the third quarter of 2011.  The sequential quarter increase of $161 million was largely driven by$172 million in charge-offs associated with the aforementioned sales of nonperforming loans.  Additionally, during the third quarter the Company elected to revise its credit policy related to the timing of recognizing charge-offs on junior lien loans. The Company previously charged-off junior lien loans at 180 days past due. However, with the newly implemented credit policy change, the Company is recognizing the charge-off at 120 days past due, as its analysis indicated that when junior lien loans become 120 days past due the vast majority ultimately experience a charge-off.  The change in credit policy resulted in $65 million of incremental charge-offs.  Excluding the impacts from the nonperforming loan sales and the junior lien credit policy change, current quarter net charge-offs were $274 million, a decline of $76 million from the prior quarter, driven by lower losses across several loan categories, as well as a $27 million increase in recoveries from the prior quarter.  The ratio of annualized net charge-offs to total average loans was 1.64% for the current quarter, with the charge-offs resulting from the sales of nonperforming loans and the credit policy change adding 76 basis points to the ratio.  The provision for credit losses was $450 million, an increase of $150 million and $103 million from the prior quarter and the third quarter of 2011, respectively.  The increase was primarily driven by incremental charge-offs associated with the sales of nonperforming loans and the junior lien credit policy change.

As of September 30, 2012, the allowance for loan losses was $2.2 billion and represented 1.84% of total loans, down 1 basis point from June 30, 2012.  The $61 million decline in the allowance for loan losses during thethird quarter of 2012 was reflective of the continued improvement in asset quality.

Early stage delinquencies decreased two basis points from the end of the second quarter of 2012 to 0.95%. The decline was primarily due to the sale of government guaranteed loans.  Excluding government-guaranteed loans, early stage delinquencies were 0.53%, an increase of two basis points from June 30, 2012.

Accruing restructured loans totaled $2.6 billion, and nonaccruing restructured loans totaled $0.5 billion as ofSeptember 30, 2012, both declining modestly from the prior quarter.  $2.8 billion of restructured loans related to residential loans, $0.2 billion were commercial loans, and $0.1 billion related to consumer loans.