SunTrust Reports Third Quarter 2018 Results

ATLANTA, Oct. 19, 2018 /PRNewswire/ -- SunTrust Banks, Inc. (NYSE: STI) reported net income available to common shareholders of $726 million, or $1.56 per average common diluted share.  These results include $0.14 per share of discrete tax benefits driven by the finalization of the impact of tax reform on the Company and the consolidation of SunTrust Mortgage into SunTrust Bank, which was completed in the third quarter.

Diluted earnings per share increased 5% sequentially and 47% year-over-year.  For the nine months ended September 30, 2018, earnings per share was $4.34, up 45% year-over-year.

"Our performance this quarter provides further validation of our successful execution against the Company's key strategies.  Our focus on efficiency continues to drive good results, with the year-to-date tangible efficiency ratio improving by 150 basis points.  Additionally, our commitment to investing in growth to meet more client needs is driving good loan growth which helped offset lower noninterest income," said William H. Rogers, Jr., chairman and CEO of SunTrust Banks, Inc.  "We have revenue momentum going into the fourth quarter of the year, and 2018 is on track to be the seventh consecutive year of growth in earnings per share, improved efficiency, and higher capital returns."

Third Quarter 2018 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 21% marginal federal tax rate for all periods beginning on or after January 1, 2018 and 35% for all periods prior to January 1, 2018, as well as 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 $726 million, or $1.56 per average common diluted share, compared to $1.49 for the prior quarter and $1.06 for the third quarter of 2017.
• The current quarter included $0.14 per average common share of discrete tax benefits.
• Total revenue was down 1% sequentially and stable year-over-year. The sequential decrease was driven by lower noninterest income, which was partially offset by higher net interest income as a result of growth in earning assets.
• Net interest margin was 3.27% in the current quarter, down 1 basis point sequentially and up 12 basis points compared to the prior year. The sequential decline was driven by higher funding costs (largely driven by increased wholesale funding), which offset the benefits of higher benchmark interest rates. The year-over-year increase was driven primarily by higher benchmark interest rates in addition to positive mix shift in the loans held for investment ("LHFI") portfolio, offset partially by higher funding costs.
• Provision for credit losses increased $29 million sequentially and decreased $59 million year-over-year. The sequential increase was driven primarily by a lesser decline in the allowance for loan and lease losses ("ALLL") and higher net charge-offs on commercial loans, while the year-over-year decrease was driven by elevated hurricane-related reserves in the third quarter of 2017.
• Noninterest expense decreased slightly both sequentially and year-over-year. The decreases were driven primarily by lower employee compensation and benefits and other noninterest expense, partially offset by higher outside processing and software costs.
• The efficiency and tangible efficiency ratios for the current quarter were 59.8% and 58.9%, respectively, which is relatively stable compared to the prior quarter and prior year.

Balance Sheet

• Average performing LHFI was up 1% compared to the prior quarter, driven by growth in C&I, CRE, residential mortgages, and consumer direct loans.
• Average consumer and commercial deposits remained relatively stable compared to both the prior quarter and prior year.

Capital

• Estimated capital ratios continue to be well above regulatory requirements. The Common Equity Tier 1 ("CET1") ratio was estimated to be 9.6% as of September 30, 2018, slightly lower than the prior quarter due to loan growth and increased share repurchases.
• During the quarter, the Company repurchased $500 million of its outstanding common stock which is 25% of the $2.0 billion authorization it received per its 2018 Capital Plan. The Company also increased its quarterly common stock dividend by 25%, from $0.40 per common share in the prior quarter to $0.50 per share.
• Book value per common share was $48.00 and tangible book value per common share was $34.51, both up slightly from June 30, 2018, driven primarily by growth in retained earnings, offset in part by an increase in accumulated other comprehensive loss.

Asset Quality

• Nonperforming loans ("NPLs") decreased $60 million from the prior quarter and represented 0.47% of period-end LHFI at September 30, 2018. The decrease was driven primarily by the return to accrual status of certain commercial credits as well as charge-offs of certain commercial loans.
• Net charge-offs for the current quarter were $88 million, or 0.24% of total average LHFI on an annualized basis, compared to 0.20% during the prior quarter and 0.21% during the third quarter of 2017.
• At September 30, 2018, the ALLL to period-end LHFI ratio was 1.10%, a 4 basis point decline compared to the prior quarter, driven by continued improvements in asset quality.
• Provision for credit losses increased $29 million sequentially and decreased $59 million year-over-year. The sequential increase was driven primarily by a lesser decline in the ALLL and higher net charge-offs on commercial loans, while the year-over-year decrease was driven by elevated hurricane-related reserves in the third quarter of 2017 and continued asset quality improvements resulting in a lower ALLL ratio.

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, a decrease of $23 million compared to the prior quarter, driven by lower noninterest income. Noninterest income decreased $47 million sequentially due largely to lower capital markets-related income, other noninterest income, and client transaction-related fees, offset partially by higher commercial real estate related income and wealth management-related income. The decrease in noninterest income was offset partially by a $24 million increase in net interest income during the current quarter. Compared to the third quarter of 2017, total revenue was stable.

Net Interest Income

Net interest income was $1.5 billion for the current quarter, an increase of $24 million compared to the prior quarter due primarily to a $1.8 billion increase in average earning assets and one more day in the current quarter, offset partially by a 1 basis point decline in the net interest margin. The $67 million increase relative to the prior year was driven largely by a 12 basis point expansion in the net interest margin and a $1.5 billion increase in average earning assets.

Net interest margin for the current quarter was 3.27%, compared to 3.28% in the prior quarter and 3.15% in the third quarter of 2017. The sequential decline was driven by higher funding costs (driven primarily by increased wholesale funding), which offset the benefits of higher benchmark interest rates. The 12 basis point increase relative to the prior year was driven primarily by higher benchmark interest rates in addition to positive mix shift in the loan portfolio, offset partially by higher funding costs.

For the nine months ended September 30, 2018, net interest income was $4.5 billion, a $199 million increase compared to the nine months ended September 30, 2017. The net interest margin was 3.26% for the first nine months of 2018, a 13 basis point increase compared to the same period in 2017.

Noninterest Income

Noninterest income was $782 million for the current quarter, compared to $829 million for the prior quarter and $846 million for the third quarter of 2017. The $47 million sequential decrease was due primarily to lower capital markets-related income, other noninterest income, and client transaction-related fees, which was partially offset by higher commercial real estate related income and wealth management-related income. Compared to the third quarter of 2017, noninterest income decreased $64 million driven primarily by lower capital markets-related income, mortgage-related income, and client transaction-related fees.

Client transaction-related fees (namely service charges on deposits, other charges and fees, and card fees) decreased $12 million sequentially due primarily to a change in our process for recognizing card rewards expenses, which resulted in four months of rewards expenses being recognized in the third quarter of 2018 (recorded as a contra-revenue). The $21 million year-over-year decrease was due primarily to the same factors that impacted the sequential quarter as well as the impact of adopting the revenue recognition accounting standard during the first quarter of 2018, which resulted in the netting of certain expense items against card fees, other charges and fees, and service charges on deposit accounts.

Investment banking income was $150 million for the current quarter, compared to $169 million in the prior quarter and prior year. The $19 million sequential and year-over-year decreases were due primarily to lower loan syndication and investment grade bond origination activity, offset partially by strong deal flow activity in equity offerings during the third quarter of 2018. Beginning in the third quarter of 2018, the Company began presenting bridge commitment fee income related to capital market transactions in 'investment banking income'. For periods prior to July 1, 2018, this income was presented in 'other charges and fees' and has been reclassified to 'investment banking income' for comparability. Capital markets bridge commitment fee income was $12 million and $21 million for the nine months ended September 30, 2018 and 2017, respectively.

Trading income was $42 million for the current quarter, compared to $53 million in the prior quarter and $51 million in the third quarter of 2017. The $11 million sequential decrease was due primarily to lower transaction activity with respect to client-related interest rate hedging activity. The $9 million year-over-year decrease was due primarily to lower trading revenues within fixed income sales and trading.

Mortgage servicing income was $43 million for the current quarter, relatively stable compared to $40 million in the prior quarter and $46 million in the third quarter of 2017. At September 30, 2018, the servicing portfolio totaled $170.5 billion, relatively stable compared to the prior quarter and a 3% increase compared to the prior year due to MSRs purchased in the first quarter of 2018 which transferred in the second quarter of 2018.

Mortgage production income for the current quarter was $40 million, compared to $43 million for the prior quarter and $61 million for the third quarter of 2017. The $21 million year-over-year decrease was due largely to lower gain on sale margins. Mortgage application volume decreased 9% sequentially and 1% compared to the third quarter of 2017. Closed loan volume decreased 2% sequentially and remained stable year-over-year.

Trust and investment management income was $80 million for the current quarter, compared to $75 million in the prior quarter and $79 million for the third quarter of 2017. The $5 million sequential increase was due primarily to seasonally higher trust fees in the current quarter.

Retail investment services income was $74 million for the current quarter, compared to $73 million in the prior quarter and $69 million in the third quarter of 2017. The $5 million year-over-year increase was due primarily to higher assets under management.

Commercial real estate related income was $24 million for the current quarter, compared to $18 million for the prior quarter and $17 million for the third quarter of 2017. The increase compared to the prior quarter and prior year was driven primarily by higher transaction volume with the Company's agency lending business and higher tax-credit-related income within the Company's affordable housing business.

Other noninterest income was $21 million for the current quarter, compared to $38 million in the prior quarter and $25 million in the third quarter of 2017. The sequential decrease was driven primarily by a $12 million remeasurement gain on a fintech equity investment recognized in the second quarter of 2018.

For the nine months ended September 30, 2018, noninterest income was $2.4 billion, compared to $2.5 billion for the nine months ended September 30, 2017. The $112 million decrease was driven by lower mortgage-related income, capital markets-related income, and client transaction-related fees.

Noninterest Expense

Noninterest expense was $1.4 billion in the current quarter, down $6 million sequentially and $7 million compared to the third quarter of 2017. The sequential decrease was driven largely by lower employee compensation and benefits, other noninterest expense, net occupancy expense, and equipment expense, offset partially by higher outside processing and software costs and marketing and customer development costs. The year-over-year decrease was due to declines across most expense categories, offset partially by higher outside processing and software costs.

Employee compensation and benefits expense was $795 million in the current quarter, compared to $802 million in the prior quarter and $806 million in the third quarter of 2017. The $7 million sequential and $11 million year-over-year decreases were primarily due to lower benefit-related costs (medical and FICA) in addition to lower compensation costs in the current quarter, offset partially by higher contract programming costs.

Outside processing and software expense was $234 million in the current quarter, compared to $227 million in the prior quarter and $203 million in the third quarter of 2017. The $7 million sequential and $31 million year-over-year increases were driven primarily by higher software-related costs related to the amortization of new and upgraded technology assets.

Net occupancy expense was $86 million in the current quarter, compared to $90 million in the prior quarter and $94 million in the prior year quarter. The $8 million year-over-year decrease was driven by lease termination gains which favorably impacted the second and third quarter of 2018 (with the majority of the benefit occurring in the third quarter of 2018).

Marketing and customer development expense was $45 million in the current quarter, compared to $40 million in the prior quarter and $45 million in the third quarter of 2017. The $5 million sequential increase was driven by normal seasonality in advertising and client development costs.

Regulatory assessments expense was $39 million in the current quarter, stable relative to the prior quarter and down $8 million compared to the third quarter of 2017. The year-over-year decrease was driven by a reduced FDIC assessment rate resulting primarily from our improved earnings profile and higher levels of unsecured debt.

Operating losses/(gains) were $18 million in the current quarter, compared to $17 million in the prior quarter and ($34) million in the third quarter of 2017. The $52 million year-over-year increase was due primarily to the favorable resolution of several legal matters during the third quarter of 2017 which resulted in $58 million of net discrete benefits.

Other noninterest expense was $108 million in the current quarter, compared to $114 million in the prior quarter and $168 million in the third quarter of 2017. The $6 million sequential decrease was driven primarily by lower severance and communications costs, offset partially by higher legal and consulting expenses. The $60 million year-over-year decrease was driven primarily by $44 million of discrete charges associated with efficiency initiatives (severance and software writedowns) recognized in the third quarter of 2017.

Noninterest expense for the nine months ended September 30, 2018 was down 1% compared to the nine months ended September 30, 2017. The $52 million decrease was driven largely by ongoing efficiency initiatives, offset partially by higher outside processing and software expense.

Income Taxes

For the current quarter, the Company recorded a provision for income taxes of $95 million compared to $171 million for the prior quarter and $225 million for the third quarter of 2017. The effective tax rate for the current quarter was 11%, compared to 19% in the prior quarter and 29% in the third quarter of 2017. The sequential decrease in the effective tax rate was due primarily to $67 million of discrete tax benefits recognized in the current quarter related to the finalization of the impact of tax reform on the Company and the completion of the merger of SunTrust Mortgage into SunTrust Bank. The year-over-year decrease in the effective tax rate was driven by the reduction in the U.S. federal corporate income tax rate from 35% to 21% in addition to the aforementioned tax benefits recognized in the current quarter.

Balance Sheet

At September 30, 2018, the Company had total assets of $211.3 billion and total shareholders' equity of $24.1 billion, representing 11% of total assets. Book value per common share was $48.00 and tangible book value per common share was $34.51, both up slightly compared to June 30, 2018, driven primarily by growth in retained earnings, offset partially by an increase in accumulated other comprehensive loss.

Loans

Average performing LHFI totaled $145.2 billion for the current quarter, up 1% compared to the prior quarter and prior year driven primarily by increases in CRE, residential mortgages, and consumer direct loans. The sequential increase was also driven by growth in the C&I portfolio. Compared to the prior year, average C&I balances declined by $645 million, driven by the sale of Premium Assignment Corporation on December 1, 2017, which included $1.3 billion of C&I loan balances.

Deposits

Average consumer and commercial deposits for the current quarter were $159.3 billion, relatively stable compared to the prior quarter and the third quarter of 2017. Sequentially, growth in time deposits was offset by declines in demand deposits and savings accounts. Year-over-year, increases in time deposits, NOW, and savings account balances were offset by declines in money market accounts and demand deposits.

Capital and Liquidity

The Company's estimated capital ratios were well above current regulatory requirements with the Common Equity Tier 1 ratio estimated to be 9.6% at September 30, 2018. The ratios of average total equity to average total assets and tangible common equity to tangible assets were 11.7% and 7.7%, respectively, at September 30, 2018. The Company continues to have substantial available liquidity in the form of cash, high-quality government-backed or government-sponsored securities, and other available contingency funding sources.

The Company declared a common stock dividend of $0.50 per common share and repurchased $500 million of its outstanding common stock in the third quarter of 2018 which is 25% of the $2.0 billion authorization it received per its 2018 Capital Plan. Additionally, the Bank issued $500 million of 4-year and $500 million of 6-year fixed-to-floating rate senior notes as well as $300 million of 4-year floating rate senior notes in the third quarter of 2018.

Asset Quality

Overall asset quality performance continues to be strong. Nonperforming assets ("NPAs") totaled $754 million at September 30, 2018, down $60 million from the prior quarter and $38 million year-over-year. The ratio of NPLs to period-end LHFI was 0.47%, 0.52%, and 0.48% at September 30, 2018, June 30, 2018, and September 30, 2017, respectively. The decrease was driven primarily by the return to accrual status of certain commercial credits as well as charge-offs of certain commercial loans. In addition, residential mortgage nonperforming loans declined due to loans transitioning from non-accruing (as a result of forbearance relief received after hurricanes) back to accruing status.

Net charge-offs totaled $88 million during the current quarter, an increase of $15 million compared to the prior quarter and $10 million compared to the third quarter of 2017, driven by increased charge-offs on commercial loans. The ratio of annualized net charge-offs to total average LHFI was 0.24% during the current quarter, compared to 0.20% during the prior quarter and 0.21% during the third quarter of 2017.

The provision for credit losses was $61 million in the current quarter, a sequential increase of $29 million and a year-over-year decrease of $59 million. The sequential increase was driven primarily by a lesser decline in the ALLL and higher net charge-offs on commercial loans, while the year-over-year decrease was driven by elevated hurricane-related reserves in the third quarter of 2017 and continued asset quality improvements resulting in a lower ALLL ratio.

At September 30, 2018, the ALLL was $1.6 billion, which represented 1.10% of period-end loans, a 4 basis point decline relative to June 30, 2018, driven by continued improvements in asset quality.

Early stage delinquencies increased 2 basis points from the prior quarter and 3 basis points from September 30, 2017 to 0.74% at September 30, 2018. Excluding government-guaranteed loans which accounted for 0.50% at September 30, 2018, early stage delinquencies were 0.24%, up 2 basis points compared to the prior quarter and down 5 basis points compared to the third quarter of 2017.

OTHER INFORMATION

About SunTrust Banks, Inc.
SunTrust Banks, Inc. (NYSE: STI) is a purpose-driven company dedicated to Lighting the Way to Financial Well-Being for the people, businesses, and communities it serves. SunTrust leads onUp, a national movement inspiring Americans to build financial confidence. Headquartered in Atlanta, the Company has two business segments: Consumer and Wholesale. Its flagship subsidiary, SunTrust Bank, operates an extensive branch and ATM network throughout the high-growth Southeast and Mid-Atlantic states, along with 24-hour digital access. Certain business lines serve consumer, commercial, corporate, and institutional clients nationally. As of September 30, 2018, SunTrust had total assets of $211 billion and total deposits of $160 billion. The Company provides deposit, credit, trust, investment, mortgage, asset management, securities brokerage, and capital market services. Learn more at suntrust.com.

Business Segment Results
The Company has included its business segment financial tables as part of this release. Revenue and income amounts labeled "FTE" in the business segment tables are reported on a fully taxable-equivalent basis. For the business segments, net interest income is computed using matched-maturity funds transfer pricing and noninterest income includes federal and state tax credits that are grossed-up on a pre-tax equivalent basis. Further, provision/(benefit) for credit losses represents net charge-offs by segment combined with an allocation to the segments of the provision/(benefit) attributable to each segment's quarterly change in the allowance for loan and lease losses ("ALLL") and unfunded commitments reserve balances. 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 Total Corporate Other results presented in this document also include Reconciling Items, which are comprised of differences created between internal management accounting practices and U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and certain matched-maturity funds transfer pricing credits and charges. A detailed discussion of the business segment results will be included in the Company's forthcoming Form 10-Q.

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 Form 10-Q. Detailed financial tables and other information are also available at investors.suntrust.com. This information is also included in a current report on Form 8-K furnished with the SEC today.

Conference Call
SunTrust management will host a conference call on October 19, 2018, at 8:00 a.m. (Eastern Time) to discuss the earnings results and business trends. Individuals may call in beginning at 7:15 a.m. (Eastern Time) by dialing 1-877-209-9920 (Passcode: SunTrust). Individuals calling from outside the United States should dial 1-612-332-1210 (Passcode: SunTrust). A replay of the call will be available approximately one hour after the call ends on October 19, 2018, and will remain available until November 19, 2018, by dialing 1-800-475-6701 (domestic) or 1-320-365-3844 (international) (Passcode: 454908). Alternatively, individuals may listen to the live webcast of the presentation by visiting the SunTrust investor relations website at investors.suntrust.com. Beginning the afternoon of October 19, 2018, individuals may access an archived version of the webcast in the "Events & Presentations" section of the SunTrust investor relations website. This webcast will be archived and available for one year.

Non-GAAP Financial Measures
This news release includes non-GAAP financial measures to describe SunTrust's performance. Additional information and reconciliations of those measures to GAAP measures are provided in the appendix to this news release beginning at page 12.

In this news release, consistent with SEC Industry Guide 3, the Company presents total revenue, net interest income, net interest margin, and efficiency ratios on a fully taxable equivalent ("FTE") basis, and ratios on an annualized basis. The FTE basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 21% for all periods beginning on or after January 1, 2018 and 35% for all periods prior to January 1, 2018, as well as state income taxes, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis. The Company believes 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. Total revenue-FTE equals net interest income-FTE plus noninterest income.

The Company presents the following additional non-GAAP measures because many investors find them useful. Specifically:

• The Company presents certain capital information on a tangible basis, including Tangible equity, Tangible common equity, the ratio of Tangible equity to tangible assets, the ratio of Tangible common equity to tangible assets, Tangible book value per share, and the Return on tangible common shareholders' equity, which removes the after-tax impact of purchase accounting intangible assets from shareholders' equity and removes related intangible asset amortization from Net income available to common shareholders. The Company believes these measures are useful to investors because, by removing the amount of intangible assets that result from merger and acquisition activity and amortization expense (the level of which may vary from company to company), it allows investors to more easily compare the Company's capital position and return on average tangible common shareholders' equity to other companies in the industry who present similar measures. The Company also believes that removing these items provides a more relevant measure of the return on the Company's common shareholders' equity. These measures are utilized by management to assess capital adequacy and profitability of the Company.
• Similarly, the Company presents Efficiency ratio-FTE, Tangible efficiency ratio-FTE, and Adjusted tangible efficiency ratio-FTE. The efficiency ratio is computed by dividing Noninterest expense by Total revenue. Efficiency ratio-FTE is computed by dividing Noninterest expense by Total revenue-FTE. Tangible efficiency ratio-FTE excludes the amortization related to intangible assets and certain tax credits. The Company believes this measure is useful to investors because, by removing the impact of amortization (the level of which may vary from company to company), it allows investors to more easily compare the Company's efficiency to other companies in the industry. Adjusted tangible efficiency ratio-FTE removes the pre-tax impact of Form 8-K items announced on December 4, 2017 and the impacts of tax reform-related items from the calculation of Tangible efficiency ratio-FTE. The Company believes this measure is useful to investors because it is more reflective of normalized operations as it reflects results that are primarily client relationship and client transaction driven. These measures are utilized by management to assess the efficiency of the Company and its lines of business.

Important Cautionary Statement About Forward-Looking Statements
This news release contains forward-looking statements. Statements regarding future growth in earnings per share, improved efficiency, and higher capital returns 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," "forecast," "goals," "targets," "initiatives," "opportunity," "focus," "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. Future dividends, and the amount of any such dividend, must be declared by our board of directors in their discretion. Also, future share repurchases and the timing of any such repurchases are subject to market conditions and management's discretion. Additional 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, 2017 and in other periodic reports that we file with the SEC.

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SOURCE SunTrust Banks, Inc.