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SunTrust Reports Fourth Quarter 2012 Results
Noninterest Income and Expense Improvements Contributed to Core Earnings Growth
By: PR Newswire
Jan. 18, 2013 06:01 AM
ATLANTA, Jan. 18, 2013 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) today reported net income available to common shareholders of $350 million, or $0.65 per average common diluted share, for the fourth quarter of 2012. This compares to earnings per share of $0.13 in the fourth quarter of last year and $1.98 per share in the prior quarter, which included $1.40 per share related to third quarter actions the Company announced to improve its risk profile and strengthen its balance sheet. For 2012, SunTrust earned $3.59 per share compared to $0.94 per share in 2011.
"Favorable performance trends continued, including strong noninterest income and lower expenses, marking another quarter of core earnings expansion," said William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc. "We concluded the year in an even stronger position, driving higher revenue and efficiency gains, while further improving our overall risk profile."
Fourth Quarter 2012 Financial Highlights
(1) Current period Tier 1 capital and Tier 1 common equity ratios are estimated as of the date of this news release.
Consolidated Financial Performance Details
Total revenue was $2.3 billion for the fourth quarter of 2012, a decrease of $1.6 billion compared to the prior quarter and a $244 million, or 12%, increase compared to the fourth quarter of last year. Excluding net securities gains, total revenue increased $388 million and $262 million compared to the prior quarter and fourth quarter of last year, respectively. The sequential quarter increase was primarily related to actions recognized in the prior quarter, which included a higher provision for mortgage repurchases and losses related to the transfer to held for sale of delinquent, government guaranteed student and mortgage loans. The increase over the fourth quarter of 2011 was primarily due to higher mortgage-related revenue and investment banking income.
For 2012, total revenue was $10.6 billion, up $2.0 billion from 2011. Excluding securities gains and losses, full year revenue was $8.6 billion, up $141 million compared to 2011. The increase was primarily driven by net interest income, mortgage-related revenue, and investment banking income, partially offset by a decline in card fees related to debit card interchange regulations that became effective in the fourth quarter of 2011.
Net Interest Income
Net interest income was $1,276 million for the fourth quarter of 2012 compared to $1,301 million for the prior quarter and $1,324 million for the fourth quarter of last year. The $25 million decline from the prior quarter was largely driven by the reduction in average loans, attributable to loan sales announced during the third quarter and completed in the current quarter. The $48 million decrease compared to the fourth quarter of last year was due to lower yields on earning assets, a decline in commercial loan-related swap income, and the foregone dividend income as a result of the accelerated termination of the agreements regarding the KO shares, partially offset by lower rates paid on deposits and a reduction in wholesale funding.
Net interest margin for the fourth quarter of 2012 was 3.36%, a decline of 2 basis points from the prior quarter and a decline of 10 basis points from the fourth quarter of last year. On a sequential quarter basis, lower loan and investment securities yields resulted in an eight basis point decline in earning asset yields. This decline was partially offset by an eight basis point reduction in rates paid on interest-bearing liabilities due to lower client deposit and long-term debt rates. Compared to the fourth quarter of last year, the decline in net interest margin was primarily due to a 37 basis point decline in loan yields, as a result of the continuation of the low interest rate environment and a decline of $40 million in commercial loan-related swap income. Declines in earning asset yields were partially offset by a 32 basis point decline in rates paid on interest-bearing liabilities, primarily on time deposits and long-term debt.
For the year, net interest income was $5.2 billion, an increase of $46 million compared to 2011. The primary drivers of the increase in net interest income were growth in average loans, a favorable shift in the deposit mix, lower average long-term debt balances, and lower rates paid on deposits and wholesale borrowings, partially offset by lower earning asset yields. Net interest margin was 3.40% in 2012 compared to 3.50% in 2011. The decline in net interest margin was due to lower yields on loans and investment securities, partially offset by lower rates paid on deposits and wholesale borrowings.
Total noninterest income was $1,015 million for the fourth quarter of 2012 compared to $2,542 million for the prior quarter and $723 million for the fourth quarter of last year. The $1.5 billion decrease from the prior quarter was driven by a $1.9 billion decline in securities gains, due to the accelerated termination of the agreements regarding the KO stock, partially offset by a lower mortgage repurchase provision, higher investment banking income, and lower losses related to the transfer to held for sale of certain delinquent, government guaranteed student and mortgage loans. The increase from the fourth quarter of last year was primarily due to higher mortgage-related and investment banking revenue.
Mortgage production income for the fourth quarter of 2012 was $241 million compared to a loss of $64 million for the prior quarter and a loss of $62 million for the fourth quarter of last year. The $305 million sequential quarter increase was driven by a $359 million decline in the mortgage repurchase provision, partially offset by declines in loan production and margins. As of December 31, 2012, the reserve for mortgage repurchases totaled $632 million, a decrease of $62 million from the prior quarter. Mortgage repurchase demands declined 5% compared to the prior quarter. Compared to the fourth quarter of last year, mortgage production income increased $303 million, due to the $203 million decrease in the mortgage repurchase provision and higher loan production and margins in the fourth quarter of 2012.
Mortgage servicing income was $45 million for the fourth quarter of 2012 compared to $64 million for the prior quarter and $22 million for the fourth quarter of last year. The $19 million sequential quarter decline was due to less favorable net hedge performance. The $23 million increase from the prior year was due to a $38 million HARP 2.0-related mortgage servicing rights write-down recognized in the prior year, partially offset by lower servicing fees in the current quarter due to a smaller servicing portfolio. As of December 31, 2012, the servicing portfolio was $145 billion compared to $158 billion at December 31, 2011.
Investment banking income was a record $112 million for the fourth quarter of 2012 compared to $83 million for the prior quarter and $87 million for the fourth quarter of last year. The increase compared to prior quarters was due to higher syndicated finance and bond origination fee income.
Trading income was $65 million for the fourth quarter of 2012 compared to $19 million for the prior quarter and $77 million for the fourth quarter of last year. Core trading income was essentially stable across these quarterly periods. The $46 million sequential quarter increase was primarily attributable to a $24 million reduction in mark-to-market losses on the Company's fair value debt and index-linked CDs and a reduction in trading-related litigation reserves. The $12 million decline in trading income compared to the fourth quarter of last year was largely driven by mark-to-market losses of $23 million on the Company's fair value debt and index-linked CDs compared to gains of $17 million in the fourth quarter of last year, as well as lower valuation gains in the current quarter related to illiquid securities, partially offset by the aforementioned reduction in litigation reserves.
Other noninterest income for the fourth quarter of 2012 was $18 million compared to a loss of $31 million in the prior quarter and income of $39 million in the fourth quarter of last year. The $49 million increase from the prior quarter was due to lower losses from loan sales. During the fourth quarter, the Company recognized $25 million of net losses, primarily related to additional sales of Ginnie Mae loans, as compared to $92 million in losses during the prior quarter. The $21 million decline in other noninterest income from the fourth quarter of last year was primarily due to the current quarter losses associated with the aforementioned sale of loans.
For the year, noninterest income was $5.4 billion compared to $3.4 billion in 2011. The $2.0 billion increase was primarily driven by higher securities gains and increased mortgage-related income, partially offset by lower card fees and losses from the loan sales described above.
Noninterest expense was $1,510 million for the fourth quarter of 2012 compared to $1,726 million for the prior quarter and $1,667 million for the fourth quarter of last year. The sequential quarter decrease of $216 million was primarily due to expenses recognized in the third quarter, including the loss related to the expected sale of affordable housing investments, the charitable contribution of the KO shares to the SunTrust Foundation, and severance expense. Also contributing to the decline was lower employee compensation and benefits in the current quarter. Compared to the fourth quarter of 2011, the $157 million noninterest expense decline was due to lower operating losses, including an accrual for a potential national mortgage servicing settlement recognized last year, as well as decreases in credit-related expenses. This was partially offset by higher personnel expenses.
Employee compensation and benefits expense decreased $42 million on a sequential quarter basis, primarily due to a reduction in contract labor costs, lower salaries attributable to a reduction of over 1,200 full-time equivalent employees during the quarter, and lower incentive compensation associated with the third quarter accelerated vesting of certain benefits due to organizational changes. Compared to the fourth quarter of last year, the $114 million increase in employee compensation and benefits expense was due in part to the fourth quarter of 2011 gain of $60 million recognized in connection with the curtailment of the Company's defined benefit pension plans, net of a discretionary 401(k) contribution. Incentive compensation was also higher in 2012, as the fourth quarter of 2011 included a year-end reduction to incentive pools, and 2012 business performance was improved. These increases were partially offset by lower salaries due to the reduction of over 2,400 full-time equivalent employees since December 31, 2011.
Operating losses increased $6 million compared to the prior quarter and decreased $139 million compared to the fourth quarter of last year. During the fourth quarter, SunTrust and nine other mortgage servicing companies entered into an agreement in principle with the Federal Reserve Board and the Office of the Comptroller of the Currency regarding the Independent Foreclosure Review. SunTrust's cash portion of the settlement was $63 million; $32 million was recognized as an operating loss during the current quarter, and $31 million had been accrued previously. The Company's portion of the settlement also includes providing $100 million in relief to borrowers. No accrual has been made for this portion of the settlement, as it is expected to substantially be covered via the Company's allowance for loan losses and other activities. The decrease in operating losses from the fourth quarter of last year primarily relates to the recognition of a $120 million liability related to the potential national mortgage servicing settlement established during the prior year, as well as lower mortgage servicing-related compensatory fees in the current quarter.
Other noninterest expense decreased $141 million from the prior quarter and $127 million from the fourth quarter of last year. The sequential quarter decline was primarily due to the third quarter $96 million loss related to the affordable housing investments and the third quarter $29 million severance expense. Additionally, credit-related expenses, which are comprised of other real estate expenses and credit and collection costs, declined $30 million compared to the prior quarter, primarily due to lower OREO losses. The decline from the prior year was primarily due to a $95 million reduction in credit-related expenses, as well as lower severance expense.
FDIC premiums and regulatory assessments decreased $13 million on a sequential quarter basis and declined $14 million compared to the fourth quarter of last year due to fluctuations in the Company's assessment rate. Outside processing and software increased $12 million on a sequential quarter basis and $14 million compared to the fourth quarter of last year, largely due to increased outsourced processing services. Amortization of intangible assets decreased $10 million on a sequential quarter basis primarily due to goodwill impairment associated with a wealth management business recognized in the prior quarter.
For the year, noninterest expense was $6.3 billion compared to $6.2 billion in 2011. The $89 million, or 1%, increase was primarily due to employee compensation and benefits expense and the affordable housing write-down, partially offset by lower credit-related expenses and the impact of the 2011 accrual for the potential national mortgage servicing settlement.
For the fourth quarter of 2012, the Company recorded an income tax provision of $62 million compared to $551 million for the prior quarter and an income tax benefit of $57 million in the fourth quarter of last year. The effective tax rate was 15% in the fourth quarter of 2012 compared to 34% in the prior quarter. The decline in the effective tax rate from the prior quarter was primarily due to lower pre-tax earnings and the favorable impact in the fourth quarter associated with certain discrete tax items.
U.S. Treasury Preferred Dividends
The Company paid dividends to the U.S. Treasury on its $4.85 billion of TARP preferred securities through the first quarter of 2011. The Company redeemed these shares at the end of the first quarter of 2011 and, therefore, did not pay such dividends during 2012 or the last three quarters of 2011. The year ended December 31, 2011 included $66 million of preferred dividends paid to the U.S. Treasury and a $74 million, or $0.14 per common share, non-cash charge related to the unamortized discount that was recognized upon the redemption of the TARP preferred shares.
As of December 31, 2012, the Company had total assets of $173.4 billion and shareholders' equity of $21.0 billion, representing 12% of total assets. Both book value and tangible book value per common share increased modestly compared to September 30, 2012, and were $37.59 and $25.98, respectively.
During the current quarter, the remaining sales of the loans announced as part of the Company's third quarter strategic actions were completed. This included the sale of $2.0 billion of student loans ($1.4 billion of which was classified as loans held for sale at the end of the third quarter and $0.6 billion of which was classified as loans held for investment), as well as the sale of $450 million of Ginnie Mae loans (which were classified as loans held for sale at the end of the third quarter). Additionally, the Company elected to sell an incremental approximate $175 million of Ginnie Mae loans, as well as $160 million in nonperforming mortgage and CRE loans. These loan sales resulted in average loans for the fourth quarter of 2012 declining to $121.6 billion from $124.1 billion during the prior quarter. This $2.5 billion, or 2%, decline was partially offset by increases in commercial and industrial and consumer indirect loans.
Average loans increased $2.1 billion, or 2%, over the fourth quarter of last year. Growth was primarily driven by commercial and industrial loans, which increased $4.2 billion, or 9%, as well as high credit-quality nonguaranteed residential loans and indirect loans that increased by $1.1 billion and $0.8 billion, respectively. Partially offsetting these increases were declines in commercial real estate, home equity loans, government guaranteed residential and student loans, and nonaccrual loans.
Securities Available for Sale
As of December 31, 2012, the Company's securities available for sale portfolio was $22.0 billion, an increase of $0.5 billion from September 30, 2012, and a decrease of $6.2 billion from December 31, 2011. The decline from the prior year related to the KO transaction and reduced holdings of agency mortgage-backed securities. For the fourth quarter of 2012, the yield on the securities portfolio declined 10 basis points sequentially to 2.68% and declined 46 basis points from the fourth quarter of last year. Approximately 29 basis points of the decline from the fourth quarter of last year was due to the forgone dividend income associated with the KO transaction.
Average consumer and commercial deposits for the fourth quarter of 2012 were $127.9 billion compared to $125.4 billion and $125.1 billion for the prior quarter and fourth quarter of last year, respectively. The favorable shift in the deposit mix toward lower-cost accounts continued during the quarter, with a $1.6 billion, or 4%, increase in demand deposits, a $0.8 billion, or 3%, increase in interest bearing transaction accounts, and a $0.9 billion, or 2%, increase in money market accounts. These increases, a portion of which were likely due to year-end seasonality, were partially offset by a $0.8 billion, or 5%, decline in time deposits.
Compared to the fourth quarter of last year, average consumer and commercial deposits increased $2.8 billion, or 2%. Average demand deposits increased $5.4 billion, or 16%, interest bearing transaction accounts increased $0.6 billion, or 2%, and savings accounts increased $0.6 billion, or 12%. The increases were partially offset by a decline of $3.3 billion, or 18%, in time deposits and $0.4 billion, or 1%, in money market accounts.
Capital and Liquidity
The Company's estimated capital ratios are well above current regulatory requirements with Tier 1 capital and Tier 1 common ratios increasing to an estimated 11.10% and 10.00%, respectively, at year-end. The ratios of total average equity to total average assets and tangible equity to tangible assets were 11.82% and 8.82%, respectively, as of December 31, 2012, each increasing from the prior quarter and fourth quarter of last year. The Company continues to have substantial available liquidity provided in the form of its client deposit base and other available funding resources, as well as its portfolio of high-quality government-backed securities and cash.
During December 2012, the Company issued 4,500 shares, or $450 million, of Series E Preferred Stock. The stock has no par value, a liquidation preference of $100,000 per share, and pays dividends quarterly, if and when declared, at an annual rate of 5.875%. Dividends may not be declared or paid on SunTrust common stock in any quarter that dividends have not been paid or declared and funds set aside for the Series E preferred stock. Additionally, dividends are noncumulative, and the Company has the ability to redeem the shares in whole or in part beginning on March 15, 2018.
Asset quality continued to improve during the quarter, with declines in nonperforming loans and nonperforming assets. Nonperforming loans totaled $1.5 billion as of December 31, 2012, down $184 million, or 11%, relative to the prior quarter. Commercial loans were the primary driver of the decline. During the current quarter, the Company reclassified mortgage and consumer loans that were discharged as a result of Chapter 7 bankruptcy, resulting in a $232 million increase to nonperforming loans. Although the vast majority of the post-Chapter 7 bankruptcy loans are current, these loans were moved to nonperforming in order to align the Company's accounting with others in the industry who adopted this treatment in the third quarter as result of guidance issued by the OCC. As previously noted, approximately $160 million of nonperforming mortgage and CRE loans were sold during the quarter.
Compared to December 31, 2011, nonperforming loans declined $1.4 billion, or 47%, with reductions across all loan categories, most significantly in residential mortgages, commercial construction, and commercial real estate. At the end of the fourth quarter of 2012, the percentage of nonperforming loans to total loans was 1.27%, down from 1.42% and 2.37% at the end of the prior quarter and the fourth quarter of last year, respectively. Other real estate owned totaled $264 million at the end of the current quarter, down 13% on a sequential quarter basis and down 45% since December 31, 2011.
Net charge-offs were $398 million in the fourth quarter of 2012 compared to $511 million for the prior quarter and $472 million for the fourth quarter of last year. The current quarter charge-offs included $79 million related to the discharged Chapter 7 bankruptcy loans and $39 million associated with the aforementioned nonperforming loan sales. Third quarter net charge-offs included $172 million related to nonperforming loan sales and $65 million related to a junior lien credit policy change. Excluding the impacts of nonperforming loan sales and policy changes from both quarters, net charge-offs were relatively stable between the third and fourth quarters. The decline in net charge-offs from the prior year was primarily driven by commercial loans, partially offset by the items noted above.
The ratio of annualized net charge-offs to total average loans was 1.30% for the current quarter, 1.64% in the prior quarter, and 1.57% in the fourth quarter of last year. Charge-offs resulting from the sales of nonperforming loans and credit policy changes in the current and prior quarters added 38 basis points and 76 basis points, respectively, to the ratio. The provision for credit losses was $328 million, a decrease of $122 million from the prior quarter and stable compared to the fourth quarter of last year. The aforementioned nonperforming loan sales and credit policy changes increased the provision in both the third and fourth quarters.
As of December 31, 2012, the allowance for loan losses was $2.2 billion and represented 1.80% of total loans, down four basis points from September 30, 2012. Excluding government guaranteed loans, the allowance for loan losses was 1.95% of total loans. The $65 million decline in the allowance for loan losses during the fourth quarter of 2012 reflects the continued improvement in asset quality.
Early stage delinquencies decreased two basis points from the end of the prior quarter to 0.93% at December 31, 2012. The decline was primarily due to residential mortgages. Excluding government-guaranteed loans, early stage delinquencies were 0.48%, a decrease of five basis points from September 30, 2012.
Accruing restructured loans totaled $2.5 billion, and nonaccruing restructured loans totaled $0.6 billion as of December 31, 2012. The Chapter 7 bankruptcy policy change resulted in nonaccruing restructured loans increasing from $0.5 billion at the end of the prior quarter. $2.8 billion of restructured loans related to residential loans, $0.2 billion were commercial loans, and $0.1 billion related to consumer loans.
LINE OF BUSINESS FINANCIAL PERFORMANCE
Line of Business Results
The Company has included line of business financial tables as part of this release on the Investor Relations portion of its website at www.suntrust.com/investorrelations. The Company's business segments include: Consumer Banking and Private Wealth Management, Wholesale Banking, and Mortgage Banking. All revenue in the line of business tables is reported on a fully taxable-equivalent basis. For the lines of business, results include net interest income, which is computed using matched-maturity funds transfer pricing. Further, provision for loan losses is represented by net charge-offs. SunTrust also reports results for Corporate Other, which includes the Treasury department as well as the residual expense associated with operational and support expense allocations. The Corporate Other segment also includes differences created between internal management accounting practices and generally accepted accounting principles ("GAAP"), certain matched-maturity funds transfer pricing credits and charges, differences in provision for loan losses compared to net charge-offs, as well as equity and its related impact. A detailed discussion of the line of business results will be included in the Company's forthcoming Annual Report on Form 10-K.
Corresponding Financial Tables and Information
Investors are encouraged to review the foregoing summary and discussion of SunTrust's earnings and financial condition in conjunction with the detailed financial tables and information which SunTrust has also published today and SunTrust's forthcoming Annual Report on Form 10-K. Detailed financial tables and other information are also available on the Investor Relations portion of the Company's website at www.suntrust.com/investorrelations. This information is also included in a current report on Form 8-K furnished with the Securities and Exchange Commission today.
SunTrust management will host a conference call on January 18, 2013, at 8:00 a.m. (Eastern Time) to discuss the earnings results and business trends. Individuals may call in beginning at 7:45 a.m. (Eastern Time) by dialing 1-888-972-7805 (Passcode: 4Q12). Individuals calling from outside the United States should dial 1-517-308-9091 (Passcode: 4Q12). A replay of the call will be available approximately one hour after the call ends on January 18, 2013, and will remain available until February 18, 2013, by dialing 1-800-813-5534 (domestic) or 1-203-369-3348 (international). Alternatively, individuals may listen to the live webcast of the presentation by visiting the SunTrust investor relations website at www.suntrust.com/investorrelations. Beginning the afternoon of January 18, 2013, listeners may access an archived version of the webcast in the "Recent Earnings and Conference Presentations" subsection found on the investor relations webpage. This webcast will be archived and available for one year. A link to the Investor Relations page is also found in the footer of the SunTrust home page.
SunTrust Banks, Inc., headquartered in Atlanta, is one of the nation's largest banking organizations, serving a broad range of consumer, commercial, corporate and institutional clients. The Company operates an extensive branch and ATM network throughout the Southeast and Mid-Atlantic States and a full array of technology-based, 24-hour delivery channels. The Company also serves clients in selected markets nationally. Its primary businesses include deposit, credit, and trust and investment management services. Through various subsidiaries, the Company provides mortgage banking, insurance, brokerage, equipment leasing, and capital markets services. SunTrust's Internet address is www.suntrust.com.
Important Cautionary Statement About Forward-Looking Statements
This news release includes non-GAAP financial measures to describe SunTrust's performance. The reconciliations of those measures to GAAP measures are provided within or in the appendix to this news release. In this news release, the Company presents net interest income and net interest margin on a fully taxable-equivalent ("FTE") basis, and ratios on an annualized basis. The FTE basis adjusts for the tax-favored status of income from certain loans and investments. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
This news release may contains forward-looking statements. Statements that do not describe historical or current facts, is a forward-looking statement. These statements often include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "goals," "targets," "initiatives," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would," and "could." Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements 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, 2011 and in other periodic reports that we file with the SEC.
SOURCE SunTrust Banks, Inc.
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