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STI > SEC Filings for STI > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for SUNTRUST BANKS INC


7-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Important Cautionary Statement About Forward-Looking Statements

This report contains forward-looking statements. Statements regarding (i) future levels of net interest margin, net interest income, net charge-offs and the trend in net charge-offs, investment banking income, marketing and other volume-related costs, noninterest expense, expected income from interest rate swaps, mortgage repurchase demands and the mortgage repurchase reserve and related provision expense, employee benefits expense, other real estate expense, the early stage delinquency ratio, RWAs and capital ratios, mortgage production income, provision expense, the ALLL, and NPLs; (ii) our belief that the reserve for unfunded commitments increased primarily due to a single facility that is expected to fund and charge-off in the second quarter of 2013; (iii) the impact to net income available to common shareholders due to lower provisions as credit quality continues to improve; and (iv) our expectations regarding Federal Reserve treatment, and the timing of such treatment, of our hybrid capital elements as no longer constituting Tier 1 capital, are forward looking statements. Also, any statement that does not describe historical or current facts is a forward-looking statement. 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 in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, and include risks discussed in this MD&A and in other periodic reports that we file with the SEC. Those factors include: our framework for managing risks may not be effective in mitigating risk and loss to us; as one of the largest lenders in the Southeast and Mid-Atlantic U.S. and a provider of financial products and services to consumers and businesses across the U.S., our financial results have been, and may continue to be, materially affected by general economic conditions, particularly unemployment levels and home prices in the U.S., and a deterioration of economic conditions or of the financial markets may materially adversely affect our lending and other businesses and our financial results and condition; legislation and regulation, including the Dodd-Frank Act, as well as future legislation and/or regulation, could require us to change certain of our business practices, reduce our revenue, impose additional costs on us, or otherwise adversely affect our business operations and/or competitive position; we are subject to capital adequacy and liquidity guidelines and, if we fail to meet these guidelines, our financial condition would be adversely affected; loss of customer deposits and market illiquidity could increase our funding costs; we rely on the mortgage secondary market and GSEs for some of our liquidity; we are subject to credit risk; our ALLL may not be adequate to cover our eventual losses; we may have more credit risk and higher credit losses to the extent our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral; we will realize future losses if the proceeds we receive upon liquidation of nonperforming assets are less than the carrying value of such assets; a downgrade in the U.S. government's sovereign credit rating, or in the credit ratings of instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, could result in risks to us and general economic conditions that we are not able to predict; the failure of the European Union to stabilize the fiscal condition and creditworthiness of its weaker member economies could have international implications potentially impacting global financial institutions, the financial markets, and the economic recovery underway in the U.S.; weakness in the real estate market, including the secondary residential mortgage loan markets, has adversely affected us and may continue to adversely affect us; we are subject to certain risks related to originating and selling mortgages, and may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or as a result of certain breaches of our servicing agreements, and this could harm our liquidity, results of operations, and financial condition; financial difficulties or credit downgrades of mortgage and bond insurers may adversely affect our servicing and investment portfolios; we may face certain risks as a servicer of loans, or also may be terminated as a servicer or master servicer, be required to repurchase a mortgage loan or reimburse investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions; we are subject to risks related to delays in the foreclosure process; we may continue to suffer increased losses in our loan portfolio despite enhancement of our underwriting policies and practices; our mortgage production and servicing revenue can be volatile; as a financial services company, 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 and liquidity; changes in interest rates could also reduce the value of our MSRs and mortgages held for sale, reducing our earnings; changes which are being considered in the method for determining LIBOR may affect the value of debt securities and other financial obligations held or issued by


SunTrust that are linked to LIBOR, or may affect the Company's financial condition or results of operations; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; depressed market values for our stock may require us to write down goodwill; 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 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 business and revenues; we rely on other companies to provide key components of our business infrastructure; a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses; the soundness of other financial institutions could adversely affect us; we depend on the accuracy and completeness of information about clients and counterparties; regulation by federal and state agencies could adversely affect the business, revenue, and profit margins; competition in the financial services industry is intense and could result in losing business or margin declines; maintaining or increasing market share depends on market acceptance and regulatory approval of new products and services; we might not pay dividends on your common stock; our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends; disruptions in our ability to access global capital markets may adversely 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 are subject to certain litigation, and our expenses related to this litigation may adversely affect our results; we may incur fines, penalties and other negative consequences from regulatory violations, possibly even from inadvertent or unintentional violations; we depend on the expertise of key personnel, and 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 strategies; our accounting policies and processes are critical to how we report our financial condition and results of operations, and they require management to make estimates about matters that are uncertain; changes in 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; and we may enter into transactions with off-balance sheet affiliates or our subsidiaries.

INTRODUCTION
This MD&A is intended to assist readers in their analysis of the accompanying consolidated financial statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and Notes. When we refer to "SunTrust," "the Company," "we," "our" and "us" in this narrative, we mean SunTrust Banks, Inc. and subsidiaries (consolidated). We are one of the nation's largest commercial banking organizations and our headquarters is 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 three business segments: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking, with the remainder in Corporate Other. See Note 14, "Business Segment Reporting," to the Consolidated Financial Statements in this Form 10-Q for a description of our business segments. In addition to deposit, credit, and trust and investment services offered by the Bank, our other subsidiaries provide mortgage banking, asset management, securities brokerage, and capital market services.
The following analysis of our financial performance for the three months ended March 31, 2013 should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements, and other information contained in this document and our Annual Report on Form 10-K for the year ended December 31, 2012. Certain reclassifications have been made to prior year consolidated financial statements and related information to conform them to the March 31, 2013 presentation. In the MD&A, net interest income, net interest margin, total revenue, and efficiency ratios are presented on an FTE 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. Additionally, we present certain non-U.S. GAAP metrics to assist investors in understanding management's view of particular financial measures, as well as to align presentation of these financial measures with peers in the industry who may also provide a similar presentation. Reconcilements for all non-U.S. GAAP measures are provided in Table 1, Selected Quarterly Financial Data.


EXECUTIVE OVERVIEW
Economic and regulatory
The first quarter of 2013 included moderate economic growth, improved labor market conditions and household spending, and further strengthening of many housing markets in which we operate. Household spending increased moderately, particularly related to spending on automobiles, durable goods, and housing, as the cost of financing these purchases remained at low levels. Compared to year end, the housing market demonstrated an increase in prices, favorable shifts in supply and demand, and some encouraging signs from certain homebuilding activity. However, uncertainty remained about the strength of economic growth amidst more restrictive fiscal policy and a continued elevated unemployment rate that ended the quarter at 7.6%. Consequently, consumer confidence decreased moderately during the quarter to the lowest level in the past 15 months. Consumer confidence also continued to be impacted by a sluggish economic recovery in the U.S., while concerns also remained over the economic health of the European Union and reports of slowing growth in other emerging economies. While some actions were taken during 2012 to ease the European sovereign debt crisis, uncertainty about the sustained financial health of certain European countries continued to exist during the first quarter as new uncertainties arose.
During the first quarter of 2013, the Federal Reserve reaffirmed that a highly accommodative monetary policy will remain in effect for a considerable time after the economic recovery strengthens. Accordingly, the Federal Reserve conveyed that it anticipates maintaining key interest rates at exceptionally low levels, at least as long as the unemployment rate remains above 6.5% and its long-term inflation goals are not met. As a result of employing its monetary policy, the Federal Reserve continues to maintain large portfolios of U.S. Treasury notes and bonds and agency MBS with plans to continue adding Treasuries and agency MBS to its portfolio during the year. The Federal Reserve outlook includes moderate economic growth, a gradual decline in unemployment, and the expectation of stable longer-term inflation. These monetary policy actions may result in a persistent low interest rate environment that may adversely affect the interest income we earn on loans and investments. Capital
During the first quarter, the Company announced capital plans in conjunction with the 2013 CCAR process and completion of the Federal Reserve's review of the Company's capital plan. The Company plans to repurchase up to $200 million of the Company's outstanding common stock beginning in the second quarter of 2013 through the first quarter of 2014. Additionally, the Board approved an increase to the quarterly common stock dividend, effective in the second quarter, to $0.10 per common share from the current $0.05 per common share, and maintaining dividend payments on the Company's preferred stock.

Our capital remained strong at March 31, 2013, as earnings drove a $344 million increase in our Tier 1 common equity, and our Tier 1 common equity ratio improved to 10.13% compared to 10.04% at December 31, 2012. Our Tier 1 capital and total capital ratios were 11.20% and 13.45%, respectively, compared to 11.13% and 13.48%, respectively, at December 31, 2012. Overall, our capital remains well above the requirements to be considered "well capitalized" according to current and proposed regulatory standards. See additional discussion of our capital and liquidity position in the "Capital Resources" and "Liquidity Risk Management" sections of this MD&A.
No further information has been published related to the Federal Reserve and other U.S. banking regulators' NPR issued during 2012 related to capital adequacy rules to implement the BCBS's Basel III framework for financial institutions in the U.S. As currently proposed, we believe that our RWA would increase primarily due to increased risk-weightings for residential mortgages, home equity loans, and commercial real estate, resulting in a decline in our capital ratios. Under the proposed rules, we estimate our current Basel III Tier 1 common ratio, on a fully phased-in basis, would be approximately 8.2%, which would be in compliance with the proposed requirements. See the "Reconcilement of Non-U.S. GAAP Measures" section in this MD&A for a reconciliation of the current Basel I ratio to the proposed Basel III ratio. We continue to dedicate the appropriate resources to the implementation of this and other regulatory rules as they become finalized and effective. See additional discussion in the "Capital Resources" section of this MD&A.

Financial performance
Continued credit quality improvement and a significant decrease in expenses drove improvement in our earnings during the first quarter of 2013 compared to the prior year. Net income available to common shareholders during the first quarter of 2013 was $340 million, or $0.63 per average diluted common share, compared to $245 million, or $0.46 per average diluted common share for the first quarter of 2012. Total revenue declined moderately as a result of the continued challenging interest rate environment, but offsetting the decline was a 33% decline in provision for credit losses and 12% decline in noninterest expenses. The decrease in the provision for credit losses was attributable to improved credit quality while the decrease in noninterest expenses, to their lowest level in three years, was driven by the abatement of cyclically high credit-related costs and our ongoing efficiency efforts. As credit quality continues to improve, the impact to net income available to common shareholders due to lower provisions for credit losses is expected to be less substantial in future periods. During the first quarter, our efficiency and tangible efficiency


ratios were 64%, an improvement of approximately 500 basis points compared to the first quarter of 2012. Lower revenues were driven by a 7% decrease in net interest income as lower rates earned on interest earning assets outpaced lower rates paid on interest bearing liabilities, causing a decline of 16 basis points in our net interest margin. We expect continued net interest margin compression during the second quarter of 2013 due to the continued low interest rate environment, as well as a decrease in commercial loan swap income due to scheduled swap maturities.
Our asset quality metrics continued to improve during the first quarter of 2013, as NPLs and NPAs both declined and annualized net charge-offs compared to average loans fell to a five year low. Total NPLs continued the downward trend with a decline of 5% from December 31, 2012, driven by reduced inflows into nonaccrual and continuing resolution of problem loans. Declines in NPLs were experienced in all categories, with the largest declines coming from the residential portfolio. OREO declined 15% compared to year end, totaling less than 0.1% of total assets at March 31, 2013, which was the result of continued disposition of properties, coupled with a moderation of inflows. Our restructured loan portfolio remained relatively flat compared to December 31, 2012, and the accruing restructured portfolio continued to exhibit strong payment performance with 96% current on principal and interest payments at March 31, 2013. Early stage delinquencies, a leading indicator of asset quality, particularly for consumer loans, declined during the first quarter, both in total and when excluding government-guaranteed loan delinquencies. This improvement was a result of our ongoing efforts to reduce risk in the portfolio as evidenced by declines in certain higher-risk loans.
At March 31, 2013, the ALLL ratio was 1.79% of total loans, a decline of one basis point compared to December 31, 2012. The provision for loan losses decreased 35% and net charge-offs decreased 46% during the first quarter of 2013 compared to the first quarter of 2012, both as a result of improved credit quality. Annualized net charge-offs to total average loans was 0.76%, driven by decreases in residential mortgages, home equity, and commercial real estate charge-offs. In the second quarter, we expect net charge-offs will remain relatively stable compared to the first quarter. Further, future improvements in our overall asset quality will likely be driven by residential loans, as the commercial and consumer portfolios are already at or near normalized levels. See additional discussion of credit and asset quality in the "Loans," "Allowance for Credit Losses," and "Nonperforming Assets," sections of this MD&A. Average loans decreased by less than 1% during the first quarter of 2013 compared to the fourth quarter of 2012, as a result of declines across most categories, predominantly offset by a 2% increase in C&I loans. The decrease during the quarter was primarily driven by the fourth quarter of 2012 sales of guaranteed student and mortgage loans, while the increase in C&I loans was due to increases late in the fourth quarter of 2012 and ongoing growth of the portfolio during the current quarter. Compared to the first quarter of 2012, average loans decreased 1% primarily related to the aforementioned loan sales in 2012 and decreases in home equity and commercial real estate loans. Partially offsetting the decreases in these loans was an increase of 9% in C&I loans and increases in indirect consumer loans and nonguaranteed mortgage loans. The percentage of our loan portfolio that is government-guaranteed remains at 8%. We remain committed to providing financing and fulfilling the credit needs in the communities that we serve and are focused on extending credit to qualified borrowers. To that end, during the first quarter of 2013, we extended approximately $23 billion in new loan originations, commitments, and renewals of commercial, residential, and consumer loans to our clients, an increase of 8% from the first quarter of 2012.
Average consumer and commercial deposits were relatively flat during the first quarter as a largely seasonal decline in noninterest- bearing DDAs was predominantly offset by an increase in interest bearing transaction, money market, and savings accounts. Further, time deposits continued their decline with a 4% decrease in average balances from the prior quarter. Compared to the first quarter of 2012, average consumer and commercial deposits increased 1% due to the shift from higher cost to lower cost deposits, led by an increase of 8% in noninterest-bearing DDAs and 4% in interest bearing transaction accounts. Partially offsetting these increases was a decline in higher cost time deposits of 18%. During the current quarter, our liquidity was further enhanced as average consumer and commercial deposits remained at near record levels while we further reduced our wholesale and short-term borrowings. Specifically, during the quarter we reduced our higher-cost wholesale funding sources, primarily long-term debt, on average, by 11%. Additionally, we reduced our average short-term borrowings by 26%. Average long-term debt and short term borrowings were also down 18% and 59%, respectively, compared to the first quarter of 2012. See additional discussions in the "Net Interest Income/Margin" and "Borrowings" sections of this MD&A.
Total revenue, on an FTE basis, decreased 5% compared to the first quarter of 2012, driven by lower net interest income as a result of the continued low interest rate environment. Net interest income, on an FTE basis, decreased 7% compared to the first quarter of 2012, primarily as a result of lower loan yields that were caused by the low interest rate environment and a decrease in our commercial loan swap-related income. Additionally, a 60 basis point decline in yields on AFS securities contributed to the decrease in net interest income, as a result of the lower interest rate environment and the foregone dividend income on shares of Coke common stock that we sold in the third quarter of 2012. Partially offsetting these declines in asset yields was a decrease in rates paid on interest-bearing liabilities due to the consumer shift to lower cost deposit products from higher cost products and a significant decline in our long-term debt expense. Our net interest margin was 3.33% for the first quarter of 2013, compared to 3.49% for the


first quarter of 2012. The decline in margin was due to the same factors as noted in the decline in net interest income. Noninterest income decreased 1% compared to the first quarter of 2012, driven by reductions in mortgage servicing related income, securities gains, and trading income, largely offset by a lower mortgage repurchase provision. Mortgage servicing related income decreased 53% as a result of lower servicing fees as the servicing portfolio declined 8% and also due to less favorable net hedge performance. The mortgage repurchase provision decreased $161 million compared to the first quarter of 2012 as a result of our third quarter of 2012 increase to the mortgage repurchase reserve to a level that reflects estimated losses of remaining expected demands on foreclosed and currently delinquent pre-2009 GSEs loan sales.
Noninterest expense decreased 12% compared to the first quarter of 2012. The driver of the decrease was an approximate 55% reduction in credit-related expenses and operating losses. Also contributing to the decrease was employee compensation, severance expense, and legal and consulting expenses. Decreases in OREO expense drove the decline in credit-related expense, and the elimination of certain expenses associated with the Independent Foreclosure Review drove the decline in legal and consulting expense. Employee compensation decreased 5% largely attributable to the reduction in full-time equivalent employees, as well as due to lower incentive compensation.
Compared to the fourth quarter of 2012, earnings before income taxes increased $86 million, driven by decreases in expenses and provision for credit losses that more than offset lower revenue. A primary driver for the decline in revenue was the $82 million decrease in mortgage production income, predominantly all of which was the result of lower gain on sale margins. Partially offsetting the decrease in gain on sale margins was an increase of $6 million in origination fees, driven by an 11% increase in production volume. Also impacting the decline in revenue during the quarter was the $44 million decrease in investment banking income. The decrease was driven by record fourth quarter investment banking income as certain transactions that were originally planned for the current quarter were accelerated into the fourth quarter as a result of the fiscal cliff uncertainty at that time. Investment banking income is also typically seasonally low during the first quarter compared to the rest of the year, so given the strength of our CIB business, we expect an increase in investment banking income during the second quarter of 2013 from the level seen this quarter. The decline . . .

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