SunTrust Banks, Inc. reported net income available to common shareholders of $457 million, or $0.91 per average common diluted share.  This compares to $0.94 for the prior quarter and $1.00 for the third quarter of 2015.  The prior quarter and prior year quarter were favorably impacted by discrete benefits of $0.05 and $0.11, respectively.  Excluding these benefits, earnings per share grew 2% sequentially and year-over-year.

"This quarter is another reflection of the success we are having in executing against our core strategies," said William H. Rogers, Jr., chairman and CEO of SunTrust Banks, Inc. "Year-to-date, revenue is up 7% and our efficiency ratio and tangible efficiency ratios have improved by 90 and 100 basis points, respectively.  Looking ahead, I remain confident in our ability to drive further long-term value for our shareholders and help our clients and communities achieve financial confidence."

Third Quarter 2016 Financial Highlights

Income Statement

• Net income available to common shareholders was $457 million, or $0.91 per average common diluted share, compared to $0.94 for the prior quarter and $1.00 for the third quarter of 2015.

  • The prior quarter and prior year quarter were favorably impacted by discrete benefits of $0.05 and $0.11, respectively.  Excluding these benefits, earnings per share grew 2% sequentially and year-over-year.

• Total revenue increased modestly compared to the prior quarter and 8% compared to the third quarter of 2015.

  • Sequential revenue growth was driven by a 1% increase in net interest income and strong capital markets-related income, offsetting net asset-related gains recognized in the prior quarter.

  • Compared to the third quarter of 2015, revenue growth was driven by an 8% increase in net interest income and 10% growth in noninterest income.

• Net interest margin was 2.96% in the current quarter, down 3 basis points sequentially and up 2 basis points compared to the prior year quarter.

• Provision for credit losses decreased $49 million sequentially due primarily to continued improvements in the asset quality of the residential loan portfolio, slower loan growth, and a lower energy-related provision.  The $65 million increase compared to the third quarter of 2015 was primarily due to higher net charge-offs.

• Noninterest expense increased 5% sequentially and 11% compared to the prior year quarter.  The sequential increase was driven by higher regulatory and compliance costs, increased costs associated with improved business performance, and higher net occupancy costs. 

  • Compared to the prior year quarter, the increase was driven by the same factors impacting the sequential increase in addition to approximately $30 million of discrete recoveries related to previous mortgage matters and approximately $30 million of lower incentive and benefit costs in the third quarter of 2015.

• The efficiency and tangible efficiency ratios in the current quarter were 63.1% and 62.5%, respectively, and were 62.2% and 61.6%, respectively, on a year-to-date basis.  The increase compared to the prior quarter and third quarter of 2015 was impacted by discrete benefits recognized in those quarters.

  • Year to date, compared to the same period a year ago, the efficiency ratio and tangible efficiency ratio improved by 103 and 119 basis points, respectively, driven by positive operating leverage.

Balance Sheet

• Average loan balances increased 1% sequentially, due primarily to growth in consumer loans, and 7% compared to the third quarter of 2015, due to broad-based growth across most asset classes.

• Average consumer and commercial deposits increased 1% sequentially and 7% compared to the third quarter of 2015, driven by growth in lower-cost deposits.

Capital

• Estimated capital ratios continue to be well above regulatory requirements.  The Common Equity Tier 1 ratio was estimated to be 9.8% as of September 30, 2016, and 9.7% on a fully phased-in basis.

• During the quarter, the Company increased its quarterly common stock dividend from $0.24 per share to $0.26 per share and repurchased $240 million of its outstanding common stock in accordance with its 2016 capital plan.

• Book value per common share was $46.63 and tangible book value per common share was $34.34, both up 1% from June 30, 2016.

Asset Quality

• Nonperforming loans increased $5 million from the prior quarter and represented 0.67% of total loans at September 30, 2016.

• Net charge-offs for the current quarter were $126 million, or 0.35% of average loans on an annualized basis, down $11 million compared to the prior quarter. 

• The provision for credit losses decreased $49 million sequentially due to continued improvements in the asset quality of the residential loan portfolio, slower loan growth, and a lower energy-related provision.

• At September 30, 2016, the ALLL to period-end loans ratio declined 2 basis points from the prior quarter driven primarily by continued improvements in the asset quality of the residential loan portfolio.

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

Revenue

Total revenue was $2.2 billion for the current quarter, an increase of $10 million compared to the prior quarter.  Net interest income increased $19 million due to growth in average earning assets and one additional day in the current quarter, while noninterest income decreased $9 million due to $44 million in net asset-related gains recognized in the prior quarter, which were substantially offset by growth in capital markets and mortgage production-related income.  Compared to the third quarter of 2015, total revenue increased $173 million, or 8%, driven by a $95 million increase in net interest income and a $78 million increase in noninterest income due to growth in mortgage and capital markets-related income, which offset gains from the sale of securities, loans, and leases recognized in the prior year quarter.

For the nine months ended September 30, 2016, total revenue was $6.6 billion, an increase of $423 million, or 7%, compared to the first nine months of 2015.  The increase was driven by the same factors that impacted the comparisons to the prior year quarter discussed above.

Net Interest Income

Net interest income was $1.3 billion for the current quarter, an increase of $19 million compared to the prior quarter due primarily to growth in average earning assets and one additional day in the current quarter, partially offset by an increase in average long-term debt.  Compared to the third quarter of 2015, the $95 million increase in net interest income was driven by growth in average earning assets and higher earning asset yields, partially offset by higher funding costs. 

Net interest margin for the current quarter was 2.96%, compared to 2.99% in the prior quarter and 2.94% in the third quarter of 2015.  When compared to the prior quarter, the 3 basis point decrease was largely driven by lower residential mortgage loan and security yields.  When compared to the prior year quarter, the 2 basis point increase was primarily due to higher benchmark interest rates in addition to continued positive mix shift within the portfolio, partially offset by higher funding costs. 

For the nine months ended September 30, 2016, net interest income was $4.0 billion, a $357 million, or 10%, increase compared to the first nine months of 2015.  The net interest margin was 2.99% for the first nine months of 2016, an 11 basis point increase compared to the same period in 2015.  The increase in both net interest income and net interest margin were driven by earning asset growth and higher earning asset yields, due primarily to higher benchmark interest rates in addition to continued positive mix shift within the portfolio.

Noninterest Income

Noninterest income was $889 million for the current quarter, compared to $898 million for the prior quarter and $811 million for the third quarter of 2015.  The $9 million sequential decrease was due to a decline in other noninterest income, which was positively impacted by $44 million in net asset-related gains recognized in the prior quarter; however, these declines were substantially offset by growth in capital markets and mortgage-related income.  Compared to the third quarter of 2015, noninterest income increased $78 million, or 10%, driven by higher mortgage and capital markets-related income, partially offset by a decline in other noninterest income due to gains from the sale of loans and leases in the prior year quarter.

Investment banking income was $147 million for the current quarter, compared to $126 million in the prior quarter and $115 million in the third quarter of 2015.  The sequential increase was due to strong deal flow activity across most product categories, particularly syndicated finance and M&A advisory services.  Compared to the third quarter of 2015, the increase was due to the same factors impacting the sequential comparison in addition to the continued strength of equity offerings.

Trading income was $65 million for the current quarter, compared to $34 million in the prior quarter and $31 million in the third quarter of 2015.  The sequential increase was driven by an increase in the counterparty credit valuation reserve in the prior quarter and higher core trading revenue in the third quarter, most notably fixed income sales and trading.  The increase compared to the third quarter of 2015 was due to more favorable market conditions.

Mortgage production income for the current quarter was $118 million, compared to $111 million for the prior quarter and $58 million for the third quarter of 2015.  The $7 million increase from the prior quarter was primarily due to higher production volume while the $60 million increase compared to the third quarter of 2015 was primarily due to higher production volume and an increase in gain-on-sale margins.  Mortgage application volume increased 6% sequentially and 54% compared to the third quarter of 2015, and closed loan production volume increased 16% sequentially and 37% compared to the third quarter of 2015.

Mortgage servicing income was $49 million for the current quarter, compared to $52 million in the prior quarter and $40 million in the third quarter of 2015.  The $3 million decrease from the prior quarter was driven primarily by higher servicing asset decay, arising from elevated refinance activity.  The $9 million increase compared to the third quarter of 2015 was due largely to higher servicing fees and improved net hedge performance, partially offset by higher servicing asset decay in the current quarter.  The servicing portfolio was $154.0 billion at September 30, 2016, compared to $149.2 billion at September 30, 2015.

Trust and investment management income was $80 million for the current quarter, compared to $75 million for the prior quarter and $86 million for the third quarter of 2015.  The $5 million increase from the prior quarter was primarily related to seasonally higher tax-related trust fees in the current quarter.  The $6 million decrease compared to the prior year quarter was primarily due to a mix shift in the portfolio and a decline in non-recurring revenue.

Client transaction-related fees (namely service charges on deposits, other charges and fees, and card fees) decreased $11 million compared to the prior quarter due to lower loan commitment fees.  Compared to third quarter of 2015, client transaction-related fees were stable.

Retail investment income was $71 million for the current quarter, compared to $72 million in the prior quarter and $77 million in the third quarter of 2015.  The $6 million decline compared to the prior year quarter was a result of reduced transactional activity, partially offset by an increase in retail brokerage managed assets.

Other noninterest income was $21 million for the current quarter, compared to $75 million in the prior quarter and $58 million in the third quarter of 2015.  The $54 million decrease compared to the second quarter was due primarily to $44 million in net asset-related gains recognized during the prior quarter in addition to certain impairments recognized in the third quarter.  The $37 million decrease compared to the third quarter of 2015 was due largely to lower gains related to loan and lease sales.

For the nine months ended September 30, 2016, noninterest income was $2.6 billion, an increase of $66 million compared to the first nine months of 2015 due to higher mortgage and capital markets-related income as well as higher client transaction-related fees, partially offset by a decline in wealth management-related income and a reduction in gains from the sale of securities, loans, and leases.

Noninterest Expense

Noninterest expense was $1.4 billion in the current quarter, an increase of $64 million and $145 million compared to the prior quarter and the third quarter of 2015, respectively.  The sequential increase was primarily driven by higher regulatory and compliance costs, increased costs associated with improved business performance, and higher net occupancy costs.  The year-over-year increase was driven by the same factors impacting the prior quarter in addition to approximately $30 million of discrete operating loss recoveries and approximately $30 million of lower incentive and benefits costs in the third quarter of 2015.

Employee compensation and benefits expense was $773 million in the current quarter, compared to $763 million in the prior quarter and $725 million in the third quarter of 2015.  The sequential increase of $10 million was due to higher salaries and incentive compensation related to improved business performance, partially offset by a seasonal decline in FICA taxes and 401(k) costs.  The $48 million increase from the third quarter of 2015 was primarily due to approximately $30 million of lower incentive and benefits costs in the prior year quarter.

Operating losses were $35 million in the current quarter, compared to $25 million in the prior quarter and $3 million in the third quarter of 2015.  The sequential increase of $10 million was due to higher regulatory, compliance, and legal-related charges.  The $32 million increase compared to the prior year was primarily due to the recognition of discrete recoveries in the third quarter of 2015 as a result of the resolution of previous mortgage matters.

Outside processing and software expense was $225 million in the current quarter, compared to $202 million in the prior quarter and $200 million in the third quarter of 2015.  The sequential increase of $23 million and the year-over-year increase of $25 million were due to increased business activity levels, higher utilization of third party services, increased investments in technology to enable ongoing efficiency initiatives, and normal quarterly variability.

FDIC premium and regulatory expense was $47 million in the current quarter, compared to $44 million in the prior quarter and $32 million in the third quarter of 2015.  The increase compared to the prior quarter was driven by the FDIC surcharge on large banks, which became effective during the third quarter, while the increase compared to the prior year quarter was due the aforementioned FDIC surcharge and higher FDIC assessment fees, as a result of deposit growth and higher assessment rates. 

Marketing and customer development expense was $38 million in the current quarter, compared to $38 million in the prior quarter and $42 million in the third quarter of 2015.  The year-over-year decrease of $4 million was due to lower advertising costs in the current quarter.

Net occupancy expense was $93 million in the current quarter, compared to $78 million in the prior quarter and $86 million in the third quarter of 2015.  The sequential increase of $15 million was due to discrete benefits recognized in the prior quarter, in addition to a reduction in amortized gains from prior sale leaseback transactions.  The $7 million increase compared to the prior year quarter was also due to a reduction in amortized gains from prior sale leaseback transactions.

Other noninterest expense was $140 million in the current quarter, compared to $142 million in the prior quarter and $126 million in the third quarter of 2015.  The $14 million increase compared to the third quarter of 2015 was driven primarily by higher legal and consulting fees in response to regulatory and compliance initiatives, as well as higher credit-related expenses recognized in the current quarter.

For the nine months ended September 30, 2016, noninterest expense was $4.1 billion compared to $3.9 billion for the first nine months of 2015.  The $200 million increase was generally related to increased revenue and business activity, increased investments in technology, and heightened regulatory and compliance costs, in addition to discrete benefits recognized in 2015.

Income Taxes

For the current quarter, the Company recorded an income tax provision of $215 million, compared to $201 million for the prior quarter and $187 million for the third quarter of 2015.  The effective tax rate for the current quarter was 31%, compared to 29% in the prior quarter and 26% in the third quarter of 2015.  The effective tax rate in the third quarter of 2015 was favorably impacted by $35 million in discrete tax benefits.

Balance Sheet

At September 30, 2016, the Company had total assets of $205.1 billion and total shareholders' equity of $24.4 billion, representing 12% of total assets.  Book value per common share was $46.63 and tangible book value per common share was $34.34, both up 1% from June 30, 2016, as growth in retained earnings offset a decrease in accumulated other comprehensive income.

Loans

Average performing loans were $141.3 billion for the current quarter, a 1% increase over the prior quarter and a 7% increase over the third quarter of 2015.  The sequential growth was driven by consumer loans and nonguaranteed residential mortgages, up $1.3 billion and $614 million, respectively.  This growth was partially offset by declines in average C&I loans and home equity products of $676 million and $389 million, respectively.  The increase compared to the third quarter of 2015 was due to broad-based growth across most asset classes.  The Company sold approximately $1.0 billion of indirect automobile loans in September of 2016 as part of its overall balance sheet optimization strategy.

Deposits

Average consumer and commercial deposits for the current quarter were $155.3 billion, an increase of 1% over the prior quarter and 7% over the third quarter of 2015.  The sequential growth was due to a 2% increase in money market account balances and a 1% increase in demand deposits.  The growth compared to the third quarter of 2015 was driven by increases in NOW, money market account balances, and demand deposits of $5.4 billion, $3.4 billion, and $1.5 billion, respectively, partially offset by a slight decline in time 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 9.8% at September 30, 2016, and 9.7% on a fully phased-in basis.  The ratios of average total equity to average total assets and tangible common equity to tangible assets were 12.12% and 8.57%, respectively, at September 30, 2016.  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.

During the third quarter, the Company declared a common stock dividend of $0.26 per common share, an 8% increase from the prior quarter.  Additionally, the Company repurchased $240 million of its outstanding common stock during the third quarter, and the Company expects to repurchase approximately $720 million of additional common stock over the next three quarters in accordance with its 2016 capital plan.

Asset Quality

Total nonperforming assets were $1.0 billion at September 30, 2016, up $18 million compared to the prior quarter and $487 million compared to the third quarter of 2015.  Compared to the prior year, the increase was driven by increases in energy-related nonperforming C&I loans and nonperforming residential home equity products which coincide with changes to the Company's home equity line workout program introduced during the first quarter of 2016.  The ratio of nonperforming loans to total loans was 0.67%, 0.67%, and 0.35% at September 30, 2016, June 30, 2016, and September 30, 2015, respectively.

Net charge-offs were $126 million during the current quarter, a decrease of $11 million and an increase of $55 million compared to the prior quarter and the third quarter of 2015, respectively.  The current quarter included $33 million in energy-related net charge-offs compared to $70 million recognized in the prior quarter.  The ratio of annualized net charge-offs to total average loans was 0.35% during the current quarter, compared to 0.39% during the prior quarter and 0.21% during the third quarter of 2015.  The provision for credit losses was $97 million in the current quarter, a decrease of $49 million and an increase of $65 million compared to the prior quarter and the third quarter of 2015, respectively.  The sequential decrease in the provision for credit losses was due to continued improvements in the asset quality of the residential loan portfolio, slower loan growth, and a lower energy-related provision.  The increase in the provision for credit losses compared to the third quarter of 2015 was driven primarily by higher net charge-offs.

At September 30, 2016, the allowance for loan and lease losses was $1.7 billion, which represented 1.23% of total loans, a decrease of $31 million from June 30, 2016, due primarily to continued improvement in the asset quality of the residential loan portfolio.

Early stage delinquencies increased 6 basis points from the prior quarter to 0.64% at September 30, 2016.  Excluding government-guaranteed loans, early stage delinquencies were 0.25%, up 2 basis points from the prior quarter and down 6 basis points compared to a year ago.

Accruing restructured loans totaled $2.5 billion and nonaccruing restructured loans totaled $306 million at September 30, 2016, of which $2.6 billion were residential loans, $126 million were commercial loans, and $123 million were consumer loans.  Nonaccruing restructured loans have increased $130 million relative to December 31, 2015, largely driven by the classification of certain modified home equity products to nonaccrual status in order to coincide with changes to our home equity line risk mitigation program during the first quarter of 2016.  At September 30, 2016, substantially all of the nonaccruing restructured home equity loans modified in 2016 were current with respect to payments and many are expected to return to accruing status after the borrowers have demonstrated six months of consistent payment history.