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STI > SEC Filings for STI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for SUNTRUST BANKS INC


8-Nov-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 charge-offs, noninterest and cyclical expenses, servicing income and servicing asset decay, the number of branches and the rate of change in the number of branches, expected income from interest rate swaps, the early stage delinquency ratio, the ALLL, the ALLL to loans ratio, NPLs, mortgage repurchase reserve, mortgage production income including refinance and purchase volumes, loan production, other real estate expense, gains on sales of OREO properties, loan growth; (ii) the benefit to net income due to lower charge-offs and ALLL as asset quality continues to improve; (iii) the contribution of interest rate swaps to net interest income and asset sensitivity; (iv) future levels of net interest margin, and the contribution of a steeper yield curve to net interest margin and net interest income; (v) the performance of the residential real estate portfolio; (vi) our expectations regarding Federal Reserve treatment, and the timing of such treatment, of our hybrid capital elements and the effect of such treatment on our regulatory capital ratios, and of our current capital levels under future Federal Reserve capital requirements; and (vii) future improvements in our overall asset quality, and (viii) our expectation that we will be able to satisfy the civil money penalty issued by the FRB by providing consumer financial relief, 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 2012 Annual Report on Form 10-K and include risks discussed in this MD&A and in other periodic reports that we file with the SEC. The estimated financial impact of legal and regulatory matters depends upon (1) the successful negotiation, execution, and delivery of definitive agreements in several matters, (2) the ultimate resolution of certain legal matters which are not yet complete, (3) management's assumptions about the extent to which such amounts may be deducted for tax purposes, (4) the agreement of other necessary parties, and (5) our assumptions about the extent to which we can provide consumer relief to satisfy our financial obligations as contemplated by the agreements in principle with regulators. Additional 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 NPAs 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 a leading provider of financial services, particularly in the Southeastern and Mid-Atlantic United States, 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 both through its branches located primarily in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia, and through other national delivery channels. 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 15, "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 and nine months ended September 30, 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 2012 Annual Report on Form 10-K. Certain reclassifications have been made to prior year consolidated financial statements and related information to conform them to the September 30, 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
Moderate improvement in economic activity and labor market conditions, increased household spending, and further strengthening of many housing markets in which we operate continued during the third quarter but was partially offset by further increases in mortgage interest rates and uncertainty surrounding the resolution of the Federal budget and increase in the debt ceiling. Household spending continued to increase as consumer confidence remained near levels last seen in 2008 and consumer borrowing costs remained at relatively low levels. Compared to December 31, 2012, the housing market continued to strengthen as demonstrated by continued price increases, favorable shifts in supply and demand, and some encouraging signs from certain homebuilding activities. However, the rise in mortgage interest rates that began in the second quarter applied pressure on the housing recovery as refinancing activity has significantly slowed and purchase activity remained at a moderate level across the industry. Further, uncertainty remained about the strength of economic growth and the impact on U.S. monetary policy amidst a continued elevated unemployment rate that ended the quarter at 7.3%, only moderately lower than at December 31, 2012.
During the third quarter of 2013, the Federal Reserve reaffirmed that a highly accommodative monetary policy will remain in effect for a considerable time after its asset purchase program ends and 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 executing 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. The Federal Reserve indicated that its asset purchases are not on a preset course and the decision to moderate purchases will be based on close monitoring of economic and financial developments over the coming months and how these developments support any continued improvement in labor market conditions and inflation objectives. Driven in large part by the financial markets' expectations regarding future Federal Reserve monetary policy actions, certain market interest rates increased and the yield curve steepened compared to December 31, 2012; however, in September the yield curve flattened somewhat as a result of the Federal Reserve's decision to not begin tapering its bond buying program. The Federal Reserve outlook includes economic growth that will strengthen from current levels with appropriate policy accommodation, a gradual decline in unemployment, and the expectation of stable longer-term inflation. See additional discussion regarding the increase in interest rates in the "Net Interest Income/Margin" and "Noninterest Income" sections of this MD&A. Capital
During the first quarter, we announced capital plans in conjunction with the 2013 CCAR process and completion of the Federal Reserve's review of our capital plan. Accordingly, during the third quarter we repurchased $50 million of our common stock. These purchases, along with the $50 million purchased in the second quarter, brings the total repurchases of common stock to $100 million during 2013. Pursuant to our capital plan, we intend to repurchase an additional $100 million of our common stock through the first quarter of 2014. Additionally, during the third quarter, we declared a quarterly common stock dividend of $0.10 per common share, which is consistent with the second quarter and a $0.05 per common share increase from the third quarter of last year.

Our capital remained strong at September 30, 2013 and was well above the requirements to be considered "well capitalized" according to current and proposed regulatory standards, as earnings during the first nine months of the year drove a $759 million increase in our Tier 1 common equity. Our Tier 1 common equity ratio remained strong at 9.94% at September 30, 2013 compared to 10.04% at December 31, 2012. The decline in the ratio compared to year end was primarily due to an increase in RWA as a result of loan growth and a refinement of risk weighting during the third quarter of 2013 for certain unused lending commitments that provide clients' access to standby letters of credit under current regulatory capital rules. This treatment of these particular unused lending commitments is not anticipated to be applicable under the Basel III capital calculation rules and, as a result, had no impact on our current quarter estimated Basel III common equity Tier 1 ratio of 9.7%. Our Tier 1 capital and total capital ratios were 10.97% and 13.04%, respectively, compared to 11.13% and 13.48%, respectively, at December 31, 2012, also declining moderately from year end primarily due to the same reasons as the Tier 1 common equity ratio decline. See additional discussion of our capital and liquidity position in the "Capital Resources" and "Liquidity Risk Management" sections of this MD&A.


The Federal Reserve published final rules in the Federal Register on October 11, 2013 related to capital adequacy requirements to implement the BCBS's Basel III framework for financial institutions in the U.S. The final rules become effective for us on January 1, 2015 and, based on our current analysis of the rules, we believe that our RWA would increase slightly primarily due to increased risk-weightings for commercial real estate, MSRs, and certain on and off balance sheet exposures, resulting in a small decline in our capital ratios. Based on our current and ongoing analysis of the recently published rules, we estimate our current Basel III common equity Tier 1 ratio, on a fully phased-in basis, would be approximately 9.7%, which would be in compliance with the capital 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 estimated Basel III ratio. See additional discussion in the "Capital Resources" section of this MD&A.

Financial performance
Net income available to common shareholders during the third quarter of 2013 was $179 million, or $0.33 per average diluted common share, and included $179 million, or $0.33 per average diluted common share, of net costs related primarily to the resolution of legacy mortgage-related matters and the completion of a taxable reorganization of certain subsidiaries that was discussed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013. In comparison, our net income to common shareholders was $1.1 billion, or $1.98 per average diluted common share for the third quarter of 2012; however, the third quarter of 2012 included $753 million of additional net income, or $1.40 per average diluted common share, driven by the early termination of agreements regarding the shares previously owned in The Coca-Cola Company resulting in the sale of those shares, net of certain expenses related to strategic actions taken during the third quarter of last year to strengthen our balance sheet. A summary of the significant items impacting each third quarter was as follows:

                                                                   Three months ended
                                                                      September 30
                                                                   2013         2012
Net income available to common shareholders                         $179       $1,066
Significant items impacting the quarter:
Operating losses related to settlement of certain
mortgage-related legal matters                                       323            -
Mortgage repurchase provision related to GSE repurchase
settlements                                                           63            -
Provision for unrecoverable servicing advances                        96            -
Securities gains related to sale of The Coca-Cola Company stock        -       (1,938 )
Mortgage repurchase provision on currently delinquent loans            -          371
Charitable expense related to The Coca-Cola Company stock
contribution                                                           -           38
Provision for credit losses related to nonperforming loan sales        -          172
Losses on sale of guaranteed loans                                     -           92
Valuation losses related to planned sale of Affordable Housing
investments                                                            -           96
Tax (benefit)/expense related to above items                        (190 )        416
Net tax benefit related to subsidiary reorganization and other
matters                                                             (113 )          -
Net income available to common shareholders, excluding
significant items impacting the quarter                             $358         $313
Net income per average common share, diluted                       $0.33        $1.98
Net income per average common share, diluted, excluding
significant items impacting the quarter                            $0.66        $0.58

The 2012 items noted above related to strategic actions taken during the third quarter of 2012 to improve our risk profile and strengthen our balance sheet. Further details about these strategic actions can be found in our Form 8-K that was filed with the SEC on September 6, 2012. The 2013 items noted above primarily related to the resolution of certain legacy mortgage-related and other matters and also included the impact of the completion of a taxable reorganization of certain subsidiaries along with other less significant tax matters. Resolving these matters reduces uncertainty in the mortgage business, improves our overall risk profile, and ultimately allows us to focus on the future of the Company and the opportunities we see in our businesses. Further details about these strategic actions can be found in our Form 8-K that was filed with the SEC on October 10, 2013. When excluding the significant items from each quarter's results, our net income and diluted earnings per common share increased 14% from the third quarter of last year as a result of the continued improvement in credit quality and a decline in noninterest expense. See Table 1, "Selected Quarterly Financial Data," for a reconciliation of net income available to common shareholders and net income per average common share, diluted, excluding Form 8-K items.
Our provision for credit losses declined 79% in the third quarter of 2013 compared to the third quarter of 2012 as a result of continued credit quality improvement and the impact in the third quarter of 2012 related to the junior lien policy change. Noninterest expense in the third quarter of 2013, excluding the expense impact from the Form 8-K items from the third quarters of this year


and last year, improved significantly compared to the same period of last year as a result of our ongoing efficiency improvement efforts as well as the abatement of cyclically high credit-related costs. Total revenue in the third quarter of 2013, excluding the impact from the Form 8-K items from the third quarters of this year and last year, decreased compared to the same period of last year due to lower mortgage-related income and net interest income, partially offset by higher wealth management and capital markets revenue in 2013. See Table 1, "Selected Quarterly Financial Data," for a reconciliation of noninterest expense and revenue excluding Form 8-K items. During the first nine months of 2013, net income available to common shareholders was $884 million, or $1.64 per average diluted common share, compared to $1.6 billion, or $2.94 per average diluted common share, during the first nine months of 2012 a decrease of 44%. The results for the first nine months of 2013 compared to the same period of last year were also driven by the significant third quarter transactions noted above in both 2013 and 2012. When excluding the Form 8-K items from both periods, net income available to common shareholders increased 28% during the first nine months of 2013 compared to the same period in 2012, primarily driven by a significantly lower provision for credit losses and moderately lower expenses, offset by lower revenues as a result of the challenging interest rate environment. See Table 1, "Selected Quarterly Financial Data," for a reconciliation of net income available to common shareholders, excluding Form 8-K items.
Our asset quality metrics continued to improve during 2013, as NPLs, NPAs, and net charge-offs all declined to six year lows. Total NPLs continued the downward trend from 2012 with a decline of 33% from December 31, 2012, driven by reduced inflows into nonaccrual, continuing resolution of problem loans, and return to accruing status of approximately $235 million of loans previously discharged in Chapter 7 bankruptcy that exhibited a period of sustained payment performance since being discharged. Declines in NPLs were experienced in most categories, with the largest declines coming from the residential portfolio driven by the Chapter 7 bankruptcy loans returning to accruing status. In the fourth quarter, we expect NPLs will continue to trend lower. Our accruing restructured loan portfolio increased compared to December 31, 2012, primarily as a result of the Chapter 7 bankruptcy loans returning to accruing status. However, the accruing restructured portfolio continued to exhibit strong payment performance with 96% current on principal and interest payments at September 30, 2013. Early stage delinquencies, a leading indicator of asset quality, particularly for consumer loans, declined during the first nine months of 2013, both in total and when excluding government-guaranteed loan delinquencies. . . .

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