(Source: PRNewswire)
ATLANTA, July 22 /PRNewswire-FirstCall/ -- SunTrust Banks, Inc. (NYSE: STI) today reported a net loss available to common shareholders for the second quarter of 2009 of $164.4 million, compared to net income available to common shareholders of $530.0 million in the second quarter of 2008. Net loss per average common share was $0.41 compared to net income per average common diluted share of $1.52 in the second quarter of 2008. The decrease in earnings compared to 2008 is primarily attributable to increased credit costs in 2009 and the gain on the sale of shares of The Coca- Cola Company ("Coke") stock in the second quarter of 2008. During the second quarter of 2009, the core business generated solid fee income, expanded net interest margin, substantially grew low cost deposits, and continued strong expense management.
"Clearly, recession-related costs continue to impact our results," said James M. Wells III, Chairman and Chief Executive Officer of SunTrust. "Yet, when you step back and look at the second quarter, three points stand out beyond the near-term financial impact of recession-driven pressures. First, with enhanced capital, improved liquidity, and bolstered reserves, we have the resources necessary to continue to manage successfully through sustained economic weakness. Second, positive trends in several areas, notably solid deposit growth, increasing net interest margin, strong expense management, and lower early-stage delinquencies, are encouraging. Lastly, our balance of client-focused execution, risk mitigation, and the long-term economic prospects of our markets positions us well to deliver steadily improving returns as we come out of this cycle."
Completion of Capital Raise
During the second quarter, the Company successfully completed its capital plan and initiatives, generating $2.3 billion of capital and exceeding the target of $2.2 billion established by the Federal Reserve under the Supervisory Capital Assessment Program ("SCAP"). The Company's capital raising transactions increased Tier 1 common equity by $2.1 billion. The transactions utilized to raise the capital were (i) the issuance of common stock, (ii) the purchase of certain preferred stock and hybrid debt securities, and (iii) the sale of Visa Class B shares. The following is a brief description of each transaction:
-- Issued 142 million common shares raising $1.8 billion in common equity,
net of transaction costs;
-- Extinguished $435.7 million in hybrid debt instruments, resulting in a
net after-tax loss of $44.1 million and an increase in Tier 1 common
equity of $120.8 million;
-- Purchased $314.2 million of Series A preferred shares, resulting in an
$89.4 million after-tax gain that is included in net loss available to
common shareholders and a $91.0 million increase in Tier 1 common
equity; and
-- Sold remaining Class B Visa shares resulting in a $69.5 million
after-tax gain.
Regulatory capital was further enhanced and remains well in excess of the capital standards for a well capitalized institution. Estimated Tier 1 common equity and Tier 1 capital as of June 30, 2009 were 7.35% and 12.25%, up 152 basis points and 123 basis points, respectively, from the prior quarter.
Loan Loss Provision
In the second quarter, the Company recorded $962.2 million in provision for loan losses, which exceeded net charge-offs of $801.2 million by $161.0 million compared to a provision for loan losses of $448.0 million during the second quarter of 2008. Provision for loan losses declined by $31.9 million during the current quarter as compared to the first quarter of 2009. Charge-offs increased $191.1 million compared to the first quarter of 2009 driven in large part by an anticipated $99.2 million increase in borrower misrepresentation charges now classified as charge-offs. The allowance for loan losses increased to $2.9 billion, or 2.37% of outstanding total loans, as of June 30, 2009.
Deposit Growth
Average total consumer and commercial deposits increased $6.0 billion, or 5.6%, over the first quarter of 2009 and $11.8 billion, or 11.6%, over the second quarter of 2008, further strengthening the Company's already strong liquidity position. The linked quarter growth was in all deposit categories, with the low cost deposit categories of demand deposits, NOW, and money market accounts increasing the most. The growth was driven by continued marketing campaigns, competitive pricing, and clients' increased preference for the security of insured deposit products. Further, through an intense focus on improved execution, the Company has been successful in improving client satisfaction, acquisition, and retention, which the Company also believes is contributing to the record level of deposits. Period-end consumer and commercial deposits were $113.7 billion, up 1.2% compared to March 31, 2009, indicating lower deposit growth toward the end of the quarter.
Second Quarter 2009 Consolidated Highlights
2nd Quarter 2nd Quarter
2009__ 2008__ % Change
Income Statement
(Dollars in millions, except per
share data)
Net income /(loss)__ $(183.5)__ $540.4__ (134.0)%
Net income/(loss) available to common
shareholders__ (164.4)__ 530.0__ (131.0)
Net income/(loss) per average common
diluted share__ (0.41)__ 1.52__ (127.0)
Revenue - fully taxable-equivalent__ 2,192.8__ 2,598.0__ (15.6)
Revenue - fully taxable-equivalent,
excluding securities gains/losses, net__ 2,217.7__ 2,048.2__ 8.3
Net interest income - fully taxable
-equivalent__ 1,121.1__ 1,185.0__ (5.4)
Provision for loan losses__ 962.2__ 448.0__ 114.8
Noninterest income__ 1,071.7__ 1,413.0__ (24.2)
Noninterest expense__ 1,528.0__ 1,375.3__ 11.1
Net interest margin__ 2.94%__ 3.13%
Balance Sheet
(Dollars in billions)
Average loans__ $124.1__ $125.2__ (0.9)%
Average consumer and commercial deposits__ 113.5__ 101.7__ 11.6
Capital
Tier 1 capital ratio (1)__ 12.25%__ 7.47%
Tier 1 common equity ratio (1)__ 7.35%__ 5.42%
Total average shareholders' equity
to total average assets__ 12.42%__ 10.37%
Asset Quality
Net charge-offs to average loans
(annualized)__ 2.59%__ 1.04%
Allowance for loan losses to period end
loans__ 2.37%__ 1.46%
Nonperforming loans to total loans__ 4.48%__ 2.09%
(1) Current period Tier 1 capital and Tier 1 common equity ratios are
estimated as of the earnings release date.
-- A net loss available to common shareholders of $164.4 million was
reported primarily due to higher provision for loan losses, the $48.4
million after-tax FDIC special assessment levied against all insured
depository institutions, $59.6 million in after-tax market valuation
losses on the Company's public debt and related hedges carried at
fair value, and $66.5 million of dividends paid on preferred stock held
by the U.S. Treasury. These charges were partially offset by the $69.5
million after-tax gain from the sale of Visa Class B shares and a $42.6
million after-tax net gain on the purchase of the Series A preferred
stock and hybrid debt securities in connection with the tender offer
executed during the current quarter.
-- Fully taxable-equivalent total revenue decreased 15.6% compared to the
second quarter of 2008 as the prior year quarter contained the gain on
the sale of Coke stock of $548.8 million and a $29.6 million gain from
the sale of a retirement services subsidiary, while the second quarter
of 2009 included the $112.1 million gain on the sale of Visa shares and
a $156.9 million recovery of impairment on mortgage servicing rights
carried at the lower of cost or market.
-- Fully taxable-equivalent net interest income declined 5.4% from the
second quarter of 2008 as yields on average earning assets declined to a
greater degree than rates paid on interest-bearing liabilities. The
increase in nonperforming loans was also a significant detriment to net
interest income. On a sequential quarter basis, fully
taxable-equivalent net interest income increased 2.6%, or 10.3%
annualized, and net interest margin increased 7 basis points to 2.94%.
Earning assets remained relatively stable compared to the first quarter
of 2009 and prior year.
-- Noninterest income decreased 24.2% from the second quarter of 2008. The
decline is primarily driven by the aforementioned gains in the second
quarter of 2008, partially offset in the current quarter by the gain on
sale of Visa shares and the recovery of impairment on the mortgage
servicing rights carried at the lower of cost or market. Positively
contributing to the variance from prior year are mortgage and capital
markets related revenues, while trust and investment management, service
charges, and retail investment income declined.
-- Noninterest expense increased 11.1% from the second quarter of 2008 as
FDIC insurance premiums, pension expense, and credit-related expenses
increased while personnel expense and other operating costs decreased.
Noninterest expense also includes a $38.9 million net loss primarily
related to the extinguishment of the hybrid debt securities during the
current quarter.
-- Total average loans decreased 0.9% from the second quarter of 2008 and
1.0% from the first quarter of 2009, principally due to reductions in
real estate construction and residential mortgage loans. These declines
were offset by similar increases in loans held for sale.
-- Average consumer and commercial deposits increased 11.6% over the second
quarter of 2008. The increase in average consumer and commercial
deposits was driven mainly by growth in NOW and money market accounts in
addition to demand deposits, which were up 15.1%. On a sequential
quarter basis, average consumer and commercial deposits increased 5.6%.
-- The estimated Tier 1 common equity, Tier 1 capital, and total average
shareholders' equity to total average assets ratios, were 7.35%,
12.25%, and 12.42%, respectively, compared to 5.83%, 11.02%, and 12.51%
as of March 31, 2009. The increase in the Tier 1 capital ratios was
primarily due to the completion of the Company's capital raising
initiatives.
-- Annualized net charge-offs were 2.59% of average loans for the second
quarter of 2009, up from 1.04% in the second quarter of 2008 and 1.97%
in the first quarter of 2009. The increase primarily reflects
deterioration in residential real estate-related and larger commercial
charge-offs.
-- Nonperforming loans to total loans increased to 4.48% as of June 30,
2009 from 3.75% as of March 31, 2009 and 2.09% as of June 30, 2008, due
mainly to increased levels of residential real estate secured and larger
commercial loans.
CONSOLIDATED FINANCIAL PERFORMANCE
Revenue
Fully taxable-equivalent total revenue was $2,192.8 million for the second quarter of 2009, a decrease of 15.6% compared to the second quarter of 2008. The decline was driven by the $548.8 million in securities gains from the sale of Coke stock and the $29.6 million gain on sale of a retirement services subsidiary, both recognized in 2008. The second quarter of 2009 included higher mortgage-related and capital markets-related income, the gain on the sale of Visa shares, and the recovery of impairment on the mortgage servicing rights carried at the lower of cost or market, partially offset by lower net interest income.
For the six months, fully taxable-equivalent total revenue was $4,407.0 million, down 8.6% from prior year. The decline was driven by significantly higher gains on securities and asset sales in 2008, and lower net interest income, investment management, and transaction based fees in 2009. Partially offsetting these items were lower market valuation losses on previously acquired illiquid securities in 2009, higher market valuation gains on the Company's public debt and related hedges carried at fair value in 2008, and higher mortgage-related and capital markets-related income.
Net Interest Income
Fully taxable-equivalent net interest income was $1,121.1 million in the second quarter of 2009, an increase of 2.6% from the first quarter of 2009 and a 5.4% decline compared to the same quarter last year. Net interest margin increased 7 basis points during the second quarter and declined 19 basis points compared to the second quarter of 2008. Net interest margin benefited from a partial normalization of the relationship between asset and liability yields as compared to the first quarter of 2009. Rates earned on average earning assets declined 10 basis points while rates paid on interest-bearing liabilities declined 17 basis points during the current quarter. Net interest income compared to the second quarter of 2008 declined, as earning asset yields, which declined 100 basis points, were more susceptible to market rate declines than rates paid on interest- bearing liabilities which declined 87 basis points. Average earning assets in the second quarter of 2009 did not change significantly compared to the first quarter of 2009 or the same quarter last year; however, net interest income benefited from the reduction in interest-bearing liabilities and the change in mix towards lower cost sources of funding. Net interest income and margin continue to be adversely affected by increased nonperforming loans.
For the six months, fully taxable-equivalent net interest income was $2,214.0 million, a decline of 5.9% from the prior year. Net interest margin declined 20 basis points. The same factors in the quarterly year over year comparison contributed to the six month decline in net interest income and margin.
Noninterest Income
Total noninterest income was $1,071.7 million for the second quarter of 2009, down 24.2% from the second quarter of 2008. The decrease was due to the $548.8 million gain from the sale of Coke stock, a $29.6 million gain from the sale of a retirement services subsidiary, both recognized in the second quarter of 2008, and partially offset by the $112.1 million gain from the sale of Visa shares in the second quarter of 2009. Market valuation losses on the Company's public debt and related hedges carried at fair value were relatively stable at $96.2 million in the second quarter of 2009 and $102.6 million in the second quarter of 2008. These losses were related to the improvement in the credit spread on the Company's public debt.
Mortgage production income was $165.4 million in the second quarter of 2009 compared to $63.5 million in the second quarter of 2008 driven by an almost 80% increase in loan production volume. Mortgage production income was adversely affected by a $49.0 million increase in reserves related to the probable repurchase of mortgage loans that were sold in prior quarters under specified terms that could result in recourse back to the Company. Mortgage servicing related income for the quarter was $139.7 million, an increase of $107.1 million over the second quarter of 2008. The second quarter of 2009 included a $156.9 million recovery of impairment on the mortgage servicing rights carried at the lower of cost or market partially offset by mark to market losses of $39.6 million on servicing rights carried at fair value, net of hedges. Securities losses of approximately $20 million recorded during the quarter related to repositioning the available for sale securities that economically hedge the mortgage servicing rights carried at the lower of cost or market. As of June 30, 2009, SunTrust serviced $173.1 billion in mortgage loans, up 9.0% from a year ago.
Trading account profits and commissions increased $19.3 million in the second quarter over the second quarter of 2008 due to higher derivatives activities and fixed income sales and trading. As previously noted, the market valuation loss recorded on the public debt and related hedges carried at fair value was $6.4 million higher in the second quarter of 2008 compared to the current quarter. Investment banking income increased 26.3% due to increased capital markets activities; however, trust and investment management income, retail investment services, and service charges on deposits declined, 25.6%, 24.9% and 8.7%, respectively, due to the adverse impact of economic conditions on financial markets and consumer spending.
For the six months, total noninterest income was $2,192.9 million, down 11.2% compared to the same period of 2008. The decline was largely due to net gains on sale of securities, primarily Coke stock, gains on sale of non-strategic businesses, gains from the sale/leaseback of certain corporate real estate properties, and the gain resulting from the Visa initial public offering, all recorded in 2008, that aggregated to $731.6 million. The 2008 items were only partially offset by the gain on the sale of Visa shares in the current quarter and a $188.2 million recovery of impairment on the mortgage servicing rights carried at the lower of cost or market. Additionally, trading account profits and commissions increased $98.4 million due to higher market valuation losses in 2008 related to acquired illiquid assets partially offset by higher gains on the Company's debt and related hedges carried at fair value in the first half of 2008.
Noninterest Expense
Total noninterest expense in the second quarter of 2009 was $1,528.0 million, up 11.1% from the second quarter of 2008, as the cost of FDIC insurance increased $137.8 million, credit-related expenses increased $45.2 million, our proportionate share of potential costs of litigation related to Visa increased $7.0 million, and debt extinguishment charges totaled $38.9 million. The increase in FDIC insurance premiums was primarily due to the $78.2 million special assessment required of all banks recorded in the second quarter of 2009. Credit-related expenses increased primarily due to higher credit and collection services costs and other real estate losses, as the Company aggressively modified and disposed of nonperforming loans. Mortgage reinsurance and operating losses, also included in credit-related expenses, have moderated. The debt extinguishment loss includes a $42.3 million loss from the purchase of hybrid debt securities in connection with the tender offer, a $4.4 million loss related to the extinguishment of $3.5 billion of FHLB advances, and a $7.8 million gain from the retirement of $70 million of debt issued under SunTrust's Global Bank Note program. Included in the net loss from the tender offer was a $164.9 million loss related to the extinguishment of the preferred stock forward sale agreement associated with the purchase of the Purchase Preferred Securities.
Total personnel expense decreased $8.2 million from the second quarter of 2008. Total personnel decreased from 31,602 as of June 30, 2008 to 28,520 as of June 30, 2009, and incentive expense declined due to an alignment of discretionary incentive compensation accruals with business performance. Total personnel expense declined 1.2% despite an increase in pension costs of nearly $30 million due to lower returns on pension assets and a decrease in the discount rate used to measure the pension obligation. The decline in personnel expense was offset by a 35.6% increase in outside processing as the Company contracted with a third party in the third quarter of 2008 to provide certain check and related processing operations. The second quarter of 2008 also included an impairment charge of $45.0 million related to a specific customer intangible asset.
For the six months, total noninterest expense was $3,680.0 million, an increase of 40.1% over the same period in 2008. The increase was primarily due to the $751.2 million non-cash goodwill impairment charge recorded in the first quarter of 2009 compared to a $45.0 million impairment charge related to a specific customer intangible asset recognized in the second quarter of 2008. Included in the first quarter of 2008 was $11.7 million in net costs from the retirement of debt and a $39.1 million reversal of a portion of the accrued liability associated with the Visa litigation. Credit- related charges increased $152.9 million year over year and FDIC insurance costs, including the special assessment, increased $180.8 million. The 31.1% increase in outside processing was primarily due to the check and related processing services contract beginning in the third quarter of 2008. The majority of the remaining expense categories declined in 2009 as the Company continued its focus on efficiency and expense management.
Income Taxes
For the second quarter and first half of 2009, the Company recognized a benefit for income taxes of $149.0 million and $299.7 million, respectively, as a result of the pre-tax losses, compared to a provision for income taxes of $202.8 million and $294.5 million, respectively, for the same periods in 2008.
U.S. Treasury Preferred Dividends
For the second quarter and year to date periods of 2009, the Company recorded $66.5 million and $132.8 million, respectively, in preferred dividends related to the $4.85 billion in preferred securities issued to the U.S. Treasury under the Capital Purchase Program. The 5.5% effective yield reflects the 5.0% dividend rate and the amortization of the discount recorded on the preferred stock at issuance.
