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STI > SEC Filings for STI > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for SUNTRUST BANKS INC

Form 10-Q for SUNTRUST BANKS INC


6-Aug-2014

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: (1) expected share repurchases; (2) future levels of net interest margin; interest income; swap income; asset sensitivity; NPLs; net charge-offs, including net charge-offs in the residential, commercial, and consumer portfolios; the ALLL; and REO gains; (3) future changes in cyclical costs; (4) future improvements to asset quality in the residential portfolio; (5) future drivers of early stage delinquencies; (6) expectations that the impact of consumer relief efforts and the implementation of certain servicing standards associated with the national mortgage servicing settlement; (7) the impact of Basel III regulatory capital rules on our total capital ratio; and (8) the future impact of required enhanced servicing standards, 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 2013 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. Additional factors include: 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; our framework for managing risks may not be effective in mitigating risk and loss to us; 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 that 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; 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 certain breaches of our servicing agreements, and this could harm our liquidity, results of operations, and financial condition; we face certain risks as a servicer of loans, and 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; financial difficulties or credit downgrades of mortgage and bond insurers may adversely affect our servicing and investment portfolios; we are subject to risks related to delays in the foreclosure process; we face risks related to recent mortgage settlements; 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; 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; the fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings; 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; 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 our 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 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 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
We are a leading provider of financial services, particularly in the Southeastern and Mid-Atlantic U.S., 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. We operate three business segments: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking, with the remainder in Corporate Other. Within each of our businesses, we have growth strategies both within our Southeastern and Mid-Atlantic footprint and targeted national markets. See Note 16, "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, mortgage banking, and trust and investment services offered by the Bank, our other subsidiaries provide asset management, securities brokerage, and capital market services.
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, Notes to the Consolidated Financial Statements, and other information contained in this document and our 2013 Annual Report on Form 10-K. When we refer to "SunTrust," "the Company," "we," "our," and "us" in this narrative, we mean SunTrust Banks, Inc. and subsidiaries (consolidated). 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.


EXECUTIVE OVERVIEW
Economic and regulatory
Moderate growth continued during the second quarter of 2014 as several key economic indicators continued to improve. Labor markets, stock markets, housing markets, corporate profits, and consumer confidence levels all displayed signs of improvement during the second quarter of 2014. While unemployment levels remained above historical averages, the overall unemployment rate continued to show improvement and was just above 6% at June 30, 2014, from just below 7% at March 31, 2014. Stock markets continued to rally, pushing indices towards all-time highs. The housing market that strengthened in 2013 continued to show sustainable signs of improvement in 2014. However, the modest rise in mortgage interest rates that began in the second quarter of 2013 resulted in the continued decline in refinancing activity. Corporate profits continued to improve as benefits from prior period operational rightsizing efforts were realized, but revenue growth remained constrained, consistent with the overall national Gross Domestic Product. Consumer confidence continued to improve as the Consumer Confidence Index in June was at its highest level since January 2008. Overall, the macroeconomic environment appears to be improving but the outlook remains somewhat unsettled with no clear consensus around the future strength of the U.S. economy in addition to increased uncertainty around the global economy. The Federal Reserve continued to maintain a highly accommodative monetary policy and indicated that this policy would remain in effect for a considerable time after its asset purchase program ends and the economic recovery strengthens. In light of cumulative progress in unemployment and labor market conditions, the Federal Reserve again indicated that it would modestly reduce the monthly pace of Treasury and agency MBS purchases beginning in August 2014, and sequentially thereafter through October 2014, when the program would conclude. In addition, the Federal Reserve indicated that this further reduction of its asset purchases was against the backdrop of likely continued improving labor market and other economic indicators. The Federal Reserve indicated that, in its view, its sizable and still increasing holdings of longer-term government securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and foster more accommodative financial conditions. The Federal Reserve outlook continues to include economic growth that will strengthen from current levels with appropriate policy accommodation, a gradual decline in unemployment, and the expectation of gradually increasing longer-term inflation.
Capital
During the first quarter, we announced capital plans upon completion of the Federal Reserve's review of and non-objection to our capital plan in conjunction with the 2014 CCAR. Accordingly, during the second quarter we increased the quarterly common stock dividend to $0.20 per common share, which reflects an increase of $0.10 per common share from the prior quarter. Additionally, we repurchased $83 million of our outstanding common stock during the second quarter, bringing our total repurchased common stock during the first six months of 2014 to $133 million. We currently expect to repurchase an additional $300 million to $350 million of outstanding common stock through the end of the first quarter of 2015. Our estimated repurchases are modestly lower than originally planned due to guidance that the industry received from the Federal Reserve in the second quarter related to the capital treatment of our forecast of certain share-based compensation, which was driven by a valuation adjustment to our noncontrolling interest in RidgeWorth and changes in employee option exercises. See additional details related to our common stock repurchases in the "Capital Resources" section of this MD&A.
Our capital position remained solid at June 30, 2014 as our capital ratios were well above the requirements to be considered "well capitalized" according to current and expected future regulatory standards. Our Tier 1 common equity ratio was 9.72% at June 30, 2014, compared to 9.82% at December 31, 2013. The decrease in the ratio compared to year end was primarily due to an increase in RWA as a result of growth in our loan portfolio and client lending commitments, partially offset by growth in retained earnings. Our Tier 1 capital and total capital ratios were 10.66% and 12.53%, respectively, at June 30, 2014 compared to 10.81% and 12.81%, respectively, at December 31, 2013. See additional discussion of our capital in the "Capital Resources" section of this MD&A.
The Federal Reserve published final rules 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. Based on our current and ongoing analysis of the final rules, we estimate our current Basel III CET 1 ratio at June 30, 2014, on a fully phased-in basis, to be approximately 9.7%, well above the regulatory requirement. See the "Selected Quarterly Financial Data and 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 of Basel III in the "Capital Resources" section of this MD&A.


Financial performance
Net income available to common shareholders during the second quarter of 2014 was $387 million, or $0.72 per average diluted common share, compared to $365 million, or $0.68 per average common diluted share for the second quarter of 2013. During the six months ended June 30, 2014, our net income available to common shareholders was $780 million, or $1.45 per average common diluted share, compared to $705 million, or $1.31 per average common diluted share during the six months ended June 30, 2013. Both periods' results in 2014 were negatively impacted by $49 million, or $0.09 per average diluted common share, related to items announced in our July 3, 2014 Form 8-K and other legacy mortgage-related matters impacting the current period. A summary of the Form 8-K and other legacy mortgage-related items that impacted our current periods' results are as follows:

                                                  Three Months Ended   Six Months Ended
(Dollars in millions, except per share amounts)     June 30, 2014        June 30, 2014
Net income available to common shareholders                   $387                $780
Form 8-K and other legacy mortgage-related items
impacting the periods:
Operating losses related to settlement of HAMP 1               204                 204
Gain on sale of RidgeWorth 2                                  (105 )              (105 )
Other legacy mortgage-related adjustments                      (25 )               (25 )
Tax benefit related to above items                             (25 )               (25 )
Net income available to common shareholders,
excluding
Form 8-K and other legacy mortgage-related items
impacting the periods                                         $436                $829
Net income per average common share, diluted                 $0.72               $1.45
Net income per average common share, diluted,
excluding
Form 8-K and other legacy mortgage-related items
impacting the periods                                        $0.81               $1.54

1 See additional discussion related to HAMP in the "Nonperforming Assets" section in this MD&A and in Note 15, "Contingencies," to the Consolidated Financial Statements in this Form 10-Q.
2 See Note 2, "Acquisitions/Dispositions," to the Consolidated Financial Statements in this Form 10-Q for additional information.

The items noted above consist of operating losses related to the settlement of certain legal matters, further detailed in our Form 8-K that was filed with the SEC on July 3, 2014, partially offset by the gain on sale of RidgeWorth, our asset management subsidiary, as well as adjustments to other legacy mortgage-related matters during the quarter. When excluding these items from each period's results, our net income and diluted earnings per common share increased 19% and 18% during the three and six months ended June 30, 2014 compared to the same periods in 2013, respectively. The increase in EPS in the current year periods is a result of declines in the provision for credit losses and continued expense discipline, partially offset by a modest decline in total revenue and a return to a more normal effective tax rate in the second quarter of 2014. See Table 1, "Selected Quarterly Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional detail and resulting impacts of the Form 8-K and other legacy mortgage-related items.
Total revenue increased $101 million and $17 million during the three and six months ended June 30, 2014, compared to the same periods in 2013, respectively. During the three months ended June 30, 2014, total revenue, excluding the gain on sale of RidgeWorth, declined $4 million compared to the same period in 2013, as higher investment banking and mortgage servicing income were offset by a decline in mortgage production income resulting from a 55% decline in production volume, driven by lower refinance activity, as well as a decrease in gain on sale margins. During the six months ended June 30, 2014, total revenue, excluding the gain on sale of RidgeWorth, declined $88 million, or 2%, compared to the same period in 2013, as a result of a 1% decrease in net interest income, coupled with the same factors that affected the quarterly comparison. Total revenue, excluding the gain on sale of RidgeWorth, increased $66 million compared to the first quarter of 2014 driven by higher noninterest income due to higher investment banking income and broad-based fee income growth. Net interest income remained stable compared to the second quarter of 2013 and declined $10 million compared to the first six months of 2013 as loan growth was offset by an overall 15 basis point and 16 basis point respective decline in earning asset yields. Net interest margin for the current quarter was 3.11%, a decline of 14 basis points compared to the second quarter of 2013, and was 3.15% for the six months ended June 30, 2014, a 14 basis point decline from the same period in 2013. The decline in net interest margin was primarily due to a decline in loan yields. Net interest income remained relatively stable compared to the first quarter of 2014 due to higher average loan balances and one additional day, offset by a seven basis point decline in loan yields during the current quarter. Looking forward, we expect the net interest margin to decline further throughout 2014, primarily due to continued compression in loan yields and anticipated lower commercial loan swap income. We expect the overall full year decline in net interest margin during 2014 compared to 2013 to be slightly less than the 16 basis point decline during the full year of 2013 when compared to 2012. As our commercial loan swaps mature, we become more asset sensitive, which is part of our


balance sheet management strategy over the medium-term. See additional discussion related to revenue, net interest income and margin, and noninterest income in the "Net Interest Income/Margin" and "Noninterest Income" sections of this MD&A.
Noninterest expense during the second quarter was $1.5 billion, which included the $179 million of specific legacy mortgage-related operating losses. Excluding these operating losses, noninterest expense decreased $49 million, or 4%, compared to the prior quarter and $45 million, or 2%, compared to the six months ended June 30, 2013, primarily driven by lower cyclical costs and our continued focus on expense management, partially offset by higher personnel expenses, which is primarily the result of targeted hiring in revenue producing positions. Noninterest expense, excluding the specific legacy mortgage-related operating losses, decreased $19 million, or 1%, during the three months ended June 30, 2014 compared to the first quarter of 2014 due to the $36 million impairment of legacy affordable housing assets recognized in the first quarter of 2014 and the seasonal decline in employee compensation, partially offset by higher operating costs and other discrete charges recognized in the current quarter. During the three and six months ended June 30, 2014, our efficiency ratio was 68.9% and 67.9%, respectively. Our tangible efficiency ratio during the three and six months ended June 30, 2014 was 68.8% and 67.8%, respectively, and when excluding the Form 8-K and other legacy mortgage-related items, our adjusted tangible efficiency ratio was 63.7% and 65.2%, respectively. We continue to target an adjusted tangible efficiency ratio of less than 64% for the full year of 2014, and our long-term tangible efficiency ratio target continues to be below 60%. See Table 1, "Selected Quarterly Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional information regarding our tangible efficiency ratio.
Our asset quality metrics continued to improve during the second quarter and first six months of 2014, though the pace of improvement in asset quality continues to moderate. Total NPLs declined 7% compared to December 31, 2013, driven by reduced inflows into nonaccrual status and continuing resolution of problem loans, primarily in our residential loan portfolio. Reductions in OREO continued, declining 20% from year end to $136 million, the lowest level since 2006. We also sold $149 million of accruing TDRs during the second quarter to further enhance our asset quality position. The financial impact of the TDR sale included $10 million in net charge-offs and a $16 million reduction in the ALLL, which drove a $6 million reduction to the provision for loan losses during the second quarter of 2014. While the TDR sale will not materially change our reported asset quality metrics, it will have a modest benefit on certain rating agency and regulatory calculations. Early stage delinquencies, a leading indicator of asset quality, particularly for consumer loans, improved during the first half of 2014, both in total and when excluding government-guaranteed loan delinquencies.
At June 30, 2014, the ALLL was 1.55% of total loans, a decline of five basis points compared to December 31, 2013. The provision for loan losses decreased 50% and 49% and net charge-offs decreased 37% and 45% during the second quarter and first six months of 2014 compared to the same periods in 2013, respectively. The declines during 2014 were the result of improved credit quality. Annualized net charge-offs to total average loans decreased to 0.35% during both the second quarter and first six months of 2014 compared to 0.59% and 0.67% during the second quarter and first six months of 2013, respectively, driven by improved asset quality that resulted in a decline in charge-offs. During the second quarter, the provision for credit losses declined $29 million, or 28%, while net charge-offs remained stable, compared to the first quarter of 2014. Going forward, we would expect continued, but modest improvements in NPLs, primarily driven by the residential portfolio. We also would expect net charge-offs in the residential portfolio to be modestly lower in the near-term; however, commercial and consumer net charge-offs are at or below normal levels and will, at some point, trend towards more normal levels. Over the near-term, we would expect the ALLL to remain generally stable, as any asset quality improvements may be offset by loan growth, and, as a result, the provision for loan losses should roughly approximate net charge-offs. 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 increased 2% during the quarter compared to the prior quarter and was primarily attributed to our C&I, CRE, and consumer direct portfolios. C&I growth was broad-based and driven by our commercial auto dealer group and other industry verticals. Growth in the CRE portfolio was driven by our institutional . . .

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