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SunTrust Reports Second Quarter 2017 Results

"Our strong performance this quarter reflects our commitment to deliver against our strategy. We continued to realize benefits from our consistent focus on optimizing our business mix and investing in growth, made further progress in improving our efficiency, and significantly increased our capital returns to shareholders," said William H. Rogers, Jr., chairman and CEO of SunTrust Banks, Inc. "Overall, I am pleased with the momentum we have created; our fundamentals are strong, our execution continues to improve, and I am confident in our ability to deliver further growth for our clients, communities, teammates, and shareholders."

Second Quarter 2017 Financial Highlights
(Commentary is on a fully taxable-equivalent basis unless otherwise noted. Consistent with SEC guidance in Industry Guide 3 that contemplates the calculation of tax-exempt income on a tax equivalent basis, net interest income, net interest margin, total revenue, and efficiency ratios are provided on a fully taxable-equivalent basis, which generally assumes a 35% marginal federal tax rate and state income taxes, where applicable. We provide unadjusted amounts in the table on page 3 of this news release and detailed reconciliations and additional information in Appendix A on pages 12 and 13.)

Income Statement

  • Net income available to common shareholders was $505 million, or $1.03 per average common diluted share, compared to $0.91 for the prior quarter and $0.94 for the second quarter of 2016.
  • Total revenue increased 1% compared to the prior quarter and 2% compared to the second quarter of 2016.
    • These increases were driven largely by higher net interest income as a result of net interest margin expansion and growth in earning assets.
  • Net interest margin was 3.14% in the current quarter, up 5 basis points sequentially and up 15 basis points compared to the prior year, driven by higher earning asset yields arising from higher benchmark interest rates, continued positive mix shift in the loan portfolio, and lower premium amortization in the securities portfolio.
  • Provision for credit losses decreased $29 million sequentially and $56 million year-over-year primarily as a result of lower net charge-offs.
  • Noninterest expense declined 5% sequentially and increased 3% compared to the prior year.
    • The sequential decrease was driven primarily by a seasonal decline in personnel costs, higher branch closure and severance costs recognized in the prior quarter, and lower operating losses.
    • The increase relative to the prior year was driven primarily by the recent acquisition of Pillar & Cohen Financial ("Pillar/Cohen"), higher compensation (as a result of improved business performance), higher net occupancy expense, and higher FDIC premiums, partially offset by lower other noninterest expense.
  • The efficiency and tangible efficiency ratios in the current quarter were 61.2% and 60.6%, respectively, which represent significant improvements compared to the prior quarter, driven primarily by seasonal declines in employee benefits costs, ongoing expense management initiatives, and solid revenue growth.

Balance Sheet

  • Average loan balances increased 1% sequentially and 2% year-over-year, driven primarily by growth in consumer lending.
  • Average consumer and commercial deposits increased slightly sequentially and increased 3% compared to the second quarter of 2016, driven by growth in demand and time deposits.

Capital

  • Estimated capital ratios continue to be well above regulatory requirements. The Common Equity Tier 1 ("CET1") ratio was estimated to be 9.7% as of June 30, 2017, and 9.5% on a fully phased-in basis.
  • During the quarter, the Company:
    • Issued $750 million of 5.05% preferred stock (Series G) and repurchased $240 million of its outstanding common stock, which completed its share repurchases under its 2016 Capital Plan.
    • Announced its 2017 Capital Plan, which includes:
      • The purchase of up to $1.32 billion of its outstanding common stock between the third quarter of 2017 and the second quarter of 2018 (representing a 38% increase).
      • A 54% increase in the quarterly common stock dividend from $0.26 per share to $0.40 per share, beginning in the third quarter of 2017, subject to approval by the Company's Board of Directors.
  • Book value per common share was $46.51 and tangible book value per common share was $33.83, both up 2% from March 31, 2017, driven primarily by growth in retained earnings.

Asset Quality

  • Nonperforming loans decreased $35 million from the prior quarter and represented 0.52% of total loans at June 30, 2017. The sequential decrease was driven by the return to accrual status of certain nonperforming energy-related loans during the current quarter.
  • Net charge-offs for the current quarter were $70 million, or 0.20% of average loans on an annualized basis, down $42 million sequentially and $67 million year-over-year driven by overall asset quality improvements for both periods as well as lower energy-related net charge-offs year-over-year.
  • The provision for credit losses decreased $29 million sequentially as a result of lower net charge-offs.
  • At June 30, 2017, the allowance for loan and lease losses ("ALLL") to period-end loans held for investment ("LHFI") ratio was 1.20%, stable compared to the prior quarter.

Income Statement (Dollars in millions, except per share data)

2Q 2017


1Q 2017


4Q 2016


3Q 2016


2Q 2016

Net interest income

$1,403


$1,366


$1,343


$1,308


$1,288

Net interest income-FTE 2

1,439


1,400


1,377


1,342


1,323

Net interest margin

3.06%


3.02%


2.93%


2.88%


2.91%

Net interest margin-FTE 2

3.14


3.09


3.00


2.96


2.99

Noninterest income

$827


$847


$815


$889


$898

Total revenue

2,230


2,213


2,158


2,197


2,186

Total revenue-FTE 2

2,266


2,247


2,192


2,231


2,221

Noninterest expense

1,388


1,465


1,397


1,409


1,345

Provision for credit losses

90


119


101


97


146

Net income available to common shareholders

505


451


448


457


475

Earnings per average common diluted share

1.03


0.91


0.90


0.91


0.94











Balance Sheet (Dollars in billions)










Average loans held for investment ("LHFI")

$144.4


$143.7


$142.6


$142.3


$141.2

Average consumer and commercial deposits

159.1


158.9


158.0


155.3


154.2











Capital










Capital ratios at period end 1 :










Tier 1 capital (transitional)

10.80%


10.40%


10.28%


10.50%


10.57%

Common Equity Tier 1 ("CET1") (transitional)

9.67


9.69


9.59


9.78


9.84

Common Equity Tier 1 ("CET1") (fully phased-in) 2

9.52


9.54


9.43


9.66


9.73

Total average shareholders' equity to total average assets

11.80


11.59


11.84


12.12


12.11











Asset Quality










Net charge-offs to average LHFI (annualized)

0.20%


0.32%


0.38%


0.35%


0.39%

ALLL to period-end LHFI

1.20


1.20


1.19


1.23


1.25

Nonperforming loans to total loans

0.52


0.55


0.59


0.67


0.67

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

Revenue

Total revenue was $2.3 billion for the current quarter, an increase of $19 million compared to the prior quarter. Net interest income increased $39 million sequentially due to a higher net interest margin and growth in average earning assets. Noninterest income decreased $20 million sequentially driven primarily by lower capital markets and mortgage-related income. Compared to the second quarter of 2016, total revenue increased $45 million, driven by a $116 million increase in net interest income, which was partially offset by a $63 million decrease in mortgage-related income.

Net Interest Income

Net interest income was $1.4 billion for the current quarter, an increase of $39 million and $116 million compared to the prior quarter and prior year, respectively. Both increases were driven primarily by net interest margin expansion and growth in earning assets.

Net interest margin for the current quarter was 3.14%, compared to 3.09% in the prior quarter and 2.99% in the second quarter of 2016. The 5 and 15 basis point increases relative to the prior quarter and prior year were driven primarily by higher earning asset yields arising from higher benchmark interest rates, continued positive mix shift in the loan portfolio, and lower premium amortization in the securities portfolio, partially offset by higher deposit costs.

For the six months ended June 30, 2017, net interest income was $2.8 billion, a $199 million increase compared to the first six months of 2016. The net interest margin was 3.11% for the first half of 2017, a 10 basis point increase compared to the same period in 2016. The increases in both net interest income and net interest margin were driven by the same factors that impacted the prior year comparison discussed above.

Noninterest Income

Noninterest income was $827 million for the current quarter, compared to $847 million for the prior quarter and $898 million for the second quarter of 2016. The $20 million sequential decrease was due primarily to lower capital markets and mortgage-related income. Compared to the second quarter of 2016, noninterest income decreased $71 million, driven largely by lower mortgage-related income and reduced service charges on deposit accounts, as well as the $44 million of net asset-related gains recognized during the second quarter of 2016. These year-over-year decreases were partially offset by higher capital markets and commercial real estate related income (which is favorably impacted by the acquisition of Pillar/Cohen in December 2016).

Investment banking income was $147 million for the current quarter, compared to $167 million in the prior quarter and $126 million in the second quarter of 2016. The $20 million decrease compared to the prior quarter is due to lower capital market originations (specifically in syndicated finance) in the current quarter following record performance in the prior quarter. The $21 million increase compared to the second quarter of 2016 was due to strong deal flow activity, particularly in syndicated finance and M&A advisory.

Trading income was $46 million for the current quarter, compared to $51 million in the prior quarter and $34 million in the second quarter of 2016. The sequential decrease was due to lower client-related interest rate hedging activity during the current quarter. The increase compared to the second quarter of 2016 was driven largely by the recognition of higher counterparty credit valuation reserves (as a result of an adjustment to the internal reserve methodology) in the second quarter of 2016.

Mortgage production income for the current quarter was $56 million, compared to $53 million for the prior quarter and 1 million for the second quarter of 2016. The $55 million decrease from the second quarter of 2016 was due to lower production volume and lower gain-on-sale margins. Mortgage application volume increased 7% sequentially and decreased 26% compared to the second quarter of 2016. Closed loan volume increased 17% sequentially, but decreased 12% compared to the second quarter of 2016.

Mortgage servicing income was $44 million for the current quarter, compared to $58 million in the prior quarter and $52 million in the second quarter of 2016. The $14 million sequential decrease was due to higher servicing asset decay and lower net hedge performance. The $8 million decrease compared to the second quarter of 2016 was due largely to lower net hedge performance and higher servicing asset decay, partially offset by higher servicing fees. At June 30, 2017 and 2016, the servicing portfolio totaled $165.6 billion and $154.5 billion, respectively, and was $164.5 billion at March 31, 2017.

Retail investment income was $70 million for the current quarter, compared to million in the prior quarter and $72 million in the second quarter of 2016. The $2 million increase compared to the prior quarter is due to growth in retail brokerage managed assets. The $2 million decrease compared to the prior year was a result of reduced client transactional activity.

Client transaction-related fees (namely service charges on deposits, other charges and fees, and card fees) increased $16 million compared to the prior quarter due largely to higher client spend activity, increased incidence rates on deposit accounts and higher commitment fees. Compared to second quarter of 2016, client transaction-related fees decreased $8 million due to the impact of the enhanced posting order process instituted during the fourth quarter of 2016.

Commercial real estate related income was $24 million for the current quarter, compared to $20 million for the prior quarter and $10 million for the second quarter of 2016. The $4 million sequential increase was due primarily to higher structured real estate-related gains. The $14 million increase compared to the second quarter of 2016 was attributable to revenue from Pillar/Cohen, which the Company acquired in December 2016.

Other noninterest income was $22 million for the current quarter, compared to $30 million in the prior quarter and $65 million in the second quarter of 2016. The $8 million decrease compared to the sequential quarter was due primarily to gains on the sale of affordable housing investments recognized during the prior quarter. The $43 million decrease compared to the prior year was due primarily to the $44 million of net asset-related gains recognized during the second quarter of 2016.

For the six months ended June 30, 2017, noninterest income was $1.7 billion, a decrease of $6 million compared to the first six months of 2016 as higher capital markets and commercial real estate related income were offset by lower mortgage-related and other noninterest income as well as reduced service charges on deposit accounts.

Noninterest Expense

Noninterest expense was $1.4 billion in the current quarter, representing a sequential decline of $77 million and an increase of $43 million compared to the second quarter of 2016. The sequential decrease was driven primarily by the seasonal decline in personnel costs, higher branch closure and severance costs recognized in the prior quarter (recorded in other noninterest expense), and lower operating losses. The increase relative to the prior year was driven primarily by the recent acquisition of Pillar/Cohen, higher compensation (as a result of improved business performance), higher net occupancy expense, and higher FDIC premiums, partially offset by lower other noninterest expense.

Employee compensation and benefits expense was $796 million in the current quarter, compared to $852 million in the prior quarter and $763 million in the second quarter of 2016. The sequential decrease of $56 million was due to the seasonal...


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