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| STI > SEC Filings for STI > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
Important Cautionary Statement About Forward-Looking Statements
This report may contain forward-looking statements. Statements that do not describe historical or current facts, including statements about future levels of revenues, net interest margin, FDIC and other regulatory expense, and credit quality are forward-looking statements. These statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "initiatives," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would," and "could." Such statements are based upon the current beliefs and expectations of management and on information currently available to management. Such statements speak as of the date hereof, and we do not assume any obligation to update the statements made herein or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements can be found beginning on page 6 of our 2008 Annual Report on Form 10-K; in Part II, Item 1A of this report; and elsewhere in our periodic reports and Current Reports on Form 8-K filed with the Securities and Exchange Commission ("SEC"), which are available at the Securities and Exchange Commission's internet site (http://www.sec.gov). Those factors include: proposed regulatory changes may adversely affect our business; difficult market conditions have adversely affected our industry; current levels of market volatility are unprecedented; the soundness of other financial institutions could adversely affect us; there can be no assurance that recently enacted legislation, or any proposed federal programs, will stabilize the U.S. financial system, and such legislation and programs may adversely affect us; the impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 ("EESA") and its implementing regulations, and actions by the FDIC, cannot be predicted at this time; credit risk; weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, has adversely affected us and may continue to adversely affect us; weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us and may continue to adversely affect us; weakness in the real estate market may adversely affect our reinsurance subsidiary; as a financial services company, adverse changes in general business or economic conditions could have a material adverse effect on our financial condition and results of operations; changes in market interest rates or capital markets could adversely affect our revenue and expense, the value of assets and obligations, and the availability and cost of capital or liquidity; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; we may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations, and financial condition; clients could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; consumers may decide not to use banks to complete their financial transactions, which could affect net income; we have businesses other than banking which subject us to a variety of risks; hurricanes and other natural disasters may adversely affect loan portfolios and operations and increase the cost of doing business; negative public opinion could damage our reputation and adversely impact our business and revenues; we rely on other companies to provide key components of our business infrastructure; we rely on our systems, employees, and certain counterparties, and certain failures could materially adversely affect our operations; we depend on the accuracy and completeness of information about clients and counterparties; regulation by federal and state agencies could adversely affect our business, revenue, and profit margins; competition in the financial services industry is intense and could result in losing business or reducing margins; future legislation could harm our competitive position; maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services; we may not pay dividends on our common stock; our ability to receive dividends from our subsidiaries accounts for most of our revenue and could affect our liquidity and ability to pay dividends; significant legal actions could subject us to substantial uninsured liabilities; recently declining values of residential real estate, increases in unemployment, and the related effects on local economics may increase our credit losses, which would negatively affect our financial results; deteriorating credit quality, particularly in real estate loans, has adversely impacted us and may continue to adversely impact us; disruptions in our ability to access global capital markets may negatively affect our capital resources and liquidity; any reduction in our credit rating could increase the cost of our funding from the capital markets; we have in the past and may in the future pursue acquisitions, which could affect costs and from which we may not be able to realize anticipated benefits; we depend on the expertise of key personnel, if these individuals leave or change their roles without effective replacements, operations may suffer; we may not be able to hire or retain additional qualified personnel and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs and reduce profitability and may adversely impact our ability to implement our business strategy; our accounting policies and processes are critical to how we report our financial condition and results of operations, and these require us to make estimates about matters that are uncertain; changes to our accounting policies or in accounting standards could materially affect how we report our financial results and condition; our stock price can be volatile; our disclosure controls and procedures may not prevent or detect all errors or acts of fraud; our financial instruments carried at fair value expose us to certain market risks; our revenues derived from our investment securities may be volatile and subject to a variety of risks; we may enter into transactions with off-balance sheet affiliates or our subsidiaries; and we are subject to market risk associated with our asset management and commercial paper conduit businesses.
We are one of the nation's largest commercial banking organizations and our headquarters are located in Atlanta, Georgia. Our principal banking subsidiary, SunTrust Bank, offers a full line of financial services for consumers and businesses through its branches located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia. Within our geographic footprint, we operate under four business segments: Retail and Commercial, Corporate and Investment Banking, Wealth and Investment Management, and Household Lending. In addition to traditional deposit, credit, and trust and investment services offered by SunTrust Bank, our other subsidiaries provide mortgage banking, credit-related insurance, asset management, securities brokerage, and capital market services. As of September 30, 2009, we had 1,690 full-service branches, including 305 in-store branches, and continue to leverage technology to provide customers the convenience of banking on the Internet, through 2,807 automated teller machines, and via twenty-four hour telebanking.
The following analysis of our financial performance for the three and nine
months ended September 30, 2009 should be read in conjunction with the financial
statements, notes to consolidated financial statements and other information
contained in this document and our 2008 Annual Report on Form 10-K. Certain
reclassifications have been made to prior year financial statements and related
information to conform them to the 2009 presentation. In Management's Discussion
and Analysis ("MD&A"), net interest income and the net interest margin and
efficiency ratios are presented on a fully taxable-equivalent ("FTE") and
annualized basis. The FTE basis adjusts for the tax-favored status of net
interest income from certain loans and investments. We believe this measure to
be the preferred industry measurement of net interest income and it enhances
comparability of net interest income arising from taxable and tax-exempt
sources. In addition, we present the following metrics excluding
goodwill/intangible impairment charges other than mortgage servicing rights
("MSRs"): total noninterest expense, net income/(loss), net income/(loss)
available to common shareholders, and net income/(loss) per average diluted
common share. We believe the removal of goodwill/intangible impairment charges
other than MSRs is useful to investors, because removing the non-cash impairment
charge provides a more representative view of normalized operations and the
measure allows better comparability with prior periods, as well as with peers in
the industry who also provide a similar presentation when applicable.
Reconcilements for all non-U.S. GAAP measures are provided on pages 60 through
61.
EXECUTIVE OVERVIEW
While many economists have declared the recession to be over or at least abating, the current economic environment continues to adversely impact our financial performance, particularly related to credit which tends to lag economic cycles. We recognize that the beginning of a recovery is just that, a beginning, and history tells us that, looking over the long term, it will take time before economic stabilization meaningfully translates into bottom line results for traditional banks. Asset quality, revenues and ultimately earnings improvement will need time to gain traction and the timing will be largely dependant upon the pace and strength of the recovery, both of which are open questions as of now. Regardless of when economists determine the end of the recession, the economy remains weak, as evidenced by many key economic indicators. Notably, the national unemployment rate increased to 9.8% at September 30, 2009, which is up from 7.2% at the end of 2008, and is predicted to climb to over 10% before ultimately easing. Furthermore, the unemployment rate within many of our markets already exceeds 10%. Additionally, home prices remain depressed or continued to decline in the third quarter in some geographic areas, particularly in some of our more significant markets.
The Federal Reserve and U.S. government have taken steps during the year to strengthen the capital of financial institutions, stimulate lending, and inject liquidity into the financial markets. More recently, the U.S. government and bank regulators are discussing how to reduce their involvement as a financial intermediary in the markets, as the markets have exhibited signs of stability; however, it appears the financial services industry is entering a new phase in its relationship with these regulatory authorities as they discuss new regulations and requirements that will affect our business. As the U.S. economy shows glimpses of recovery, it is uncertain how long the recessionary pressures will continue before a full and sustained recovery may take root. We believe that SunTrust possesses the resources necessary to successfully manage through sustained economic weakness should it occur; however, we are encouraged by some positive core business trends and the prospects of an improving economy.
Despite the challenging economic environment, we remain acutely focused on clients, improving service quality and front-line execution, controlling expenses, and managing risk. During the quarter, we experienced positive trends in many of our businesses. While we continue to work through higher credit costs, soft fee income, and weak loan demand as a result of the economy, we experienced additional deposit growth, improved funding mix, increasing net interest margin, positive fee income growth in certain areas, continued strong expense management, and stable early stage delinquencies and nonperforming loans when compared to the previous quarter. As a result of these positive factors, combined with our enhanced capital position, we believe we are well positioned to deliver improving results as the operating environment improves.
The difficult economic environment during 2009 negatively impacted our financial performance during both the third quarter of 2009 and the year to date period. During the third quarter of 2009, we realized a net loss available to common shareholders of $377.1 million, or $0.76 per common share, and for the nine months ended September 30, 2009, we recorded a net loss of $1.4 billion
available to common shareholders, or $3.41 per common share. The net loss during the quarter was primarily a result of increased provisioning for loan and lease losses and $131.3 million, or $0.16 per common share, of market valuation losses on our public debt and related hedges carried at fair value as the credit markets continue to improve and credit spreads narrowed. The nine month period also included a $714.8 million, after tax, or $1.72 per common share, non-cash goodwill impairment charge.
During the second quarter, the federal bank regulatory agencies completed a review, called the Supervisory Capital Assessment Program ("SCAP") and commonly referred to as the "stress test," of the capital needs through the end of 2010 of the nineteen largest U.S. bank holding companies. The Federal Reserve announced the results of the SCAP on May 7, 2009. The Federal Reserve advised us that, based on the SCAP review, we presently have and are projected to continue to have Tier 1 capital well in excess of the amount required to be well capitalized through the forecast period under both the baseline scenario and the more adverse-than-expected scenario ("more adverse") as estimated by the U.S. Treasury. The SCAP's more adverse scenario represents a hypothetical scenario that involves a recession that is longer and more severe than consensus expectations and results in higher than expected credit losses, but is not a forecast of expected losses or revenues. The Federal Reserve advised us that based on the more adverse scenario that it required us to adjust the composition of our Tier 1 capital by increasing the Tier 1 common equity portion by $2.2 billion. The common equity increase prescribed by the Federal Reserve is necessary to maintain Tier 1 common equity at 4% of risk weighted assets under the more adverse scenario, as specified by a new regulatory standard that was introduced as part of the stress test. This increase satisfied the regulatory request that we have an increased mix of common equity as a percentage of Tier 1 capital, to serve as a buffer against higher losses than generally expected, and allow us to remain well capitalized and able to lend to creditworthy borrowers should such losses materialize.
During the second quarter, in response to the SCAP, we successfully completed our capital plan and initiatives, generating $2.3 billion of capital and exceeding the target of $2.2 billion established by the Federal Reserve. The transactions utilized to raise the capital included the issuance of common stock, the purchase of certain preferred stock and hybrid debt securities, and the sale of Visa Class B shares. These capital raising transactions increased Tier 1 common equity by $2.1 billion and were the driving factor in the increase in our Tier 1 common equity ratio to 7.49% at September 30, 2009 compared to 5.83% at December 31, 2008. During the second quarter, we completed all required capital initiatives and believe that relative to the more adverse scenario additional capital will be achieved through a combination of lower losses and higher earnings than projected by SCAP. As a result of the successful capital plan and initiatives, we have the ability and desire to repay the U.S. government for funds borrowed in the form of preferred stock issued by us under the Troubled Asset Relief Program ("TARP"). However, our repayment of TARP funds is predicated on approval by our primary regulator, the Federal Reserve. For the three and nine months ended September 30, 2009, we declared $60.6 million and $182.1 million, respectively, in dividends payable to the U.S. Treasury. See additional discussion of SCAP and the capital plan and initiatives in the "Capital Resources" section of this MD&A.
Our capital and liquidity remained strong during the quarter, as evidenced by the increase in our capital ratios and growth in deposits. The total average equity to total average assets ratio was 13.03% which was a 61 basis point increase compared to prior quarter and an increase of 262 basis points from the comparable quarter in the prior year. Our Tier 1 common equity ratio improved to 7.49% from 5.83% at December 31, 2008. In addition, our Tier 1 capital ratio increased to 12.58% which is a 171 basis point increase from 10.87% at December 31, 2008. These improvements were the result of the capital raised during the second quarter of 2009, as well as lower risk weighted assets from a reduction in loans and unfunded commitments. We also have substantial available liquidity as the inflows of high quality deposits have largely been retained in cash and invested in high quality government-backed securities. See additional discussion of our capital and liquidity position in the "Capital Resources" and "Liquidity Risk" sections of this MD&A.
In the third quarter, average loans declined $4.3 billion, or 3.5%, compared to the second quarter and have declined $7.8 billion, or 6.1%, since the fourth quarter of 2008. Our aggressive effort to reduce exposure to construction lending continued in the third quarter, as evidenced by the 15.9% decline in average quarterly balances versus the previous quarter and the 48.4% decline compared to the third quarter of last year. The majority of the overall decline in loans, though, is coming from the commercial loan category which declined over $3 billion, or 8.3%, during the third quarter. This reduction continued the trend of declining line of credit utilization among our mid-size and larger corporate clients due to improved access to capital markets and lower working capital needs. For example, our large corporate client line utilization has dropped from an average of 34% in the fourth quarter of last year to 26% during the third quarter of 2009. The decline in the remaining loan categories is primarily due to weak loan demand as a result of the economic environment, which has caused clients to be focused on capital preservation and an allocation of excess funds for debt reduction. We remain focused on extending credit to qualified borrowers as businesses and consumers work through the current economic downturn. Despite this reduction, new loan originations, commitments, and renewals of commercial and consumer loans were approximately $22 billion during the quarter and $72 billion year to date, with residential mortgage originations leading the way.
During the third quarter, we increased our holdings of U.S. Treasury and agency securities by over $4 billion in light of the increased liquidity from higher deposits and lower loan balances. In addition, agency mortgage-backed securities ("MBS") declined by approximately $2 billion. This decline was related to sales later in the third quarter where we had the opportunity to manage the portfolio's duration by selling bonds at a gain and repositioning the MBS portfolio into securities that we believe have higher relative value. As a result of the securities sales, we realized $55.7 million in gains during the quarter. Since quarter end, we have purchased agency MBS to replace the securities sold and we will continue to look for additional opportunities in the fourth quarter.
During the third quarter, we continued to see an increase, albeit at a moderating rate, in average consumer and commercial deposits of $1.0 billion, or 0.8%, bringing the total average increase since the fourth quarter of 2008 to $12.2 billion, or 12.0%. Growth has occurred in all deposit products with money market and demand deposit accounts increasing the most. This record level of deposits was driven by the industry-wide trend of clients seeking the security of bank deposits; however, we believe our improved products and pricing, enhanced client service, and the "Live Solid. Bank Solid." brand advertising specifically assisted us in attracting new clients and expanding existing relationships. Further, through an intense focus on improved execution, we have been successful in improving client satisfaction, acquisition, and retention. Additionally, as a result of the increase in these core deposits, we have been able to reduce our exposure to foreign deposits and higher-cost brokered deposits by $2.3 billion, or 28.8%, since year end. While we witnessed solid growth in core deposits during the first nine months of 2009, it appears to have moderated considerably in the third quarter, causing us to believe that it may further moderate going forward as the economy improves. Despite the moderation in total deposit growth, the mix of deposits continues to shift towards lower cost transaction accounts.
The allowance for loan losses increased $673.0 million from year end, increasing to 2.61% of total loans, up 75 basis points from year end, due to an increase in provisioning as a result of further deterioration in the housing market coupled with the decline in total loans. Compared to the previous quarter, the allowance for loan losses increased $128.0 million, which compares favorably to the $161.0 million, $384.0 million, and $410.0 million increase recognized over the previous three quarters. While consumer-related early stage delinquencies remained stable, loss severities related to the underlying residential properties continued to increase. The provision for loan losses was $1.1 billion during the quarter, which is a 17.8% increase when compared to the second quarter and a 14.1% increase compared to the first quarter. Net charge-offs increased to $1.0 billion in the third quarter of 2009 compared to $801.2 million in the second quarter and $610.1 million in the first quarter. The majority of our credit losses relate to loans secured by residential real estate. However, we are seeing some signs of weakness in our commercial client base related to stress on their revenues and overall profitability, particularly those in cyclical industries that are more directly impacted by the current recessionary conditions. The increase in net charge-offs during the quarter was primarily related to large corporate borrowers in economically cyclical industries, residential mortgages, and the resolution of loan workouts related to the home builder portfolio. Annualized net charge-offs during the quarter were 3.33% of average loans, up from 2.59% in the second quarter, and 1.97% in the first quarter. While net charge-offs remain elevated, early stage delinquencies have decreased in almost all loan categories in the past three quarters relative to their peak at year end. We continue to employ extensive loan workout programs that are designed to help clients stay in their homes by re-working residential mortgages and home equity loans to achieve payment structures that borrowers can afford. We have implemented numerous loss mitigation efforts and are working to effectively manage elevated levels of nonperforming loans. Our nonperforming loans decreased $59.6 million and accruing restructured loans increased $418.6 million from prior quarter, but both remain elevated from year end levels as a result of the continued recessionary environment. The decrease in nonperforming loans, the first quarterly decrease since the credit crisis began in 2007, was mainly due to a reduction in nonaccrual commercial loans as the result of charge-offs recognized during the quarter and the transfer of certain loans out of nonaccrual due to improved performance. While not a primary driver of the improvement, our proactive mortgage loan modification programs have had a positive influence on these delinquency and nonperforming loan trends. The increase in restructured loans is due to us taking proactive steps to responsibly modify loans in order to mitigate loss exposure to borrowers experiencing financial difficulty. See additional discussion of credit and asset quality in the "Loans", "Allowance for Loan and Lease Losses", "Provision for Loan Losses", and "Nonperforming Assets" sections of this MD&A.
Overall, revenue remained soft with stable net interest income and lower noninterest income. Net interest income, on a fully taxable equivalent basis, increased $47.1 million, or 4.2%, compared to the second quarter, and it has increased 6.9% from the first quarter. The increase is due to lower deposit pricing and improved funding mix as a result of increased core deposits that facilitated a reduction in higher cost deposits and long-term debt. As a result, our net interest margin increased to 3.10% from 2.94% in the second quarter and 2.87% during the first quarter. In the fourth quarter, loan and deposit pricing are the primary opportunities to generate margin expansion, while the primary risks relate to the possibility that nonperforming assets will rise and loan demand will remain sluggish. Noninterest income declined $296.6 million, or 27.7%, from the second quarter, most notably due to gains on the sale of Visa shares as well as recovery of previously impaired MSRs, both of which occurred in the second quarter. In addition, mortgage production income has declined from the previous two quarter record highs as a result of a 43% decline in loan applications and a 31% decline in loan production. However, over one-half of the decline in loan production income is due to an increase in estimated losses recorded related to the potential repurchase of certain mortgage loans that had previously been sold to third parties, as the volume of claims and anticipated loss severity has increased. However, despite the decrease from prior quarter in mortgage-related income, we witnessed a second consecutive quarter of revenue improvement in our core business revenues as seen in deposit service charges, card fees, trust and investment management income, investment banking, and other charges and fees. Noninterest expense
declined $99.1 million, or 6.5%, from the second quarter primarily as a result of the FDIC special assessment recorded in the second quarter that did not recur in the third quarter. When excluding the $751.2 million non-cash goodwill impairment charge recorded in the first quarter of 2009 and the $78.2 million FDIC special assessment recorded in the second quarter of 2009, noninterest expense decreased in the nine month period compared to the comparable period in the prior year, primarily due to our vigilance on expense management. See additional discussion of our financial performance in the "Consolidated Financial Results" section of this MD&A.
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