SunTrust Banks, Inc. reported Monday net income available to common shareholders of $393 million, or $0.73 per average common diluted share, representing a 16% increase from the first quarter of 2013.  Earnings per average common diluted share were $0.77 in the prior quarter. 

"Our 16% earnings per share growth over the past year reflects progress in several key areas--expense management, credit quality improvement, and increased lending to clients," said William H. Rogers, Jr., Chairman and Chief Executive Officer of SunTrust Banks, Inc.  "To deliver further profitable growth, we are focusing our efforts on meeting more of our clients' needs and expanding relationships in key growth areas, while continuing our expense management discipline."

First Quarter 2014 Financial Highlights

Income Statement

• Net income available to common shareholders was $393 million, or $0.73 per average common diluted share, compared to $413 million, or $0.77 per share, in the prior quarter.  Both quarters' results included discrete items that benefited the effective tax rate.
• Total revenue decreased $31 million, or 2%, compared to the prior quarter.
  • Net interest income declined slightly due to fewer days.    
  • Noninterest income decreased $23 million compared to the prior quarter driven by lower transaction-related fees and seasonally lower investment banking income, partially offset by higher mortgage-related income.  Compared to the first quarter of 2013, noninterest income increased across most categories, except for the anticipated decline in mortgage production income due to lower refinance activity.
• Noninterest expense decreased $4 million sequentially.
  • Compensation and benefits costs increased $77 million compared to the fourth quarter primarily due to the typical increase in incentive and employee benefit-related costs recognized in the first quarter.  All other expense categories declined compared to the prior quarter.  Compared to the first quarter of 2013, expenses were largely unchanged. 

Balance Sheet

• Average performing loans increased $2.9 billion sequentially, or 2%, with growth concentrated in C&I, commercial real estate, and consumer loans.  Average performing loans increased $8.2 billion, or 7%, compared to the first quarter of 2013 driven by broad-based growth.   
• Average client deposits increased 1% both sequentially and from the first quarter of 2013 with the favorable mix shift toward lower-cost deposits continuing.

Capital

• Estimated capital ratios continued to be well above regulatory requirements. The Basel I and Basel III Tier 1 common ratios were an estimated 9.9% and 9.7%, respectively.
• During the quarter, the Company announced capital plans, subject to the approval of SunTrust's Board of Directors, that include:
  • The purchase of up to $450 million of its common shares between the second quarter of 2014 and the first quarter of 2015.
  • An increase in the quarterly common stock dividend from $0.10 per share to $0.20 per share. 
• Book value per share was $39.44 and tangible book value per common share was $27.82, up 2% and 3%, respectively compared to December 31, 2013. The increase was primarily due to retained earnings growth.

Asset Quality

• Asset quality continued to improve as nonperforming loans decreased 5% from the prior quarter and totaled 0.72% of total loans at March 31, 2014. 
• Annualized net charge-offs decreased to 0.35% of average loans compared to 0.40% in the prior quarter, while the allowance for loan losses to total loans ratio declined slightly to 1.58%.
• The provision for credit losses was stable on a sequential quarter basis and declined $110 millioncompared to the first quarter of 2013.

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

Revenue

Total revenue was $2.0 billion for the current quarter, a decrease of $31 million, or 2%, compared to the prior quarter. The decrease was primarily driven by modest declines in net interest income and noninterest income, driven by fewer days in the current quarter and seasonally lower investment banking income, partially offset by higher mortgage-related income. Compared to the first quarter of 2013, total revenue declined $84 million, or 4%, primarily driven by declines in mortgage production income and net interest income and partially offset by higher investment banking, mortgage servicing, and wealth management related income. 

Net Interest Income

Net interest income was $1.2 billion for the current quarter, a decrease of $8 million from the prior quarter primarily driven by two fewer days in the current quarter and a one basis point decline in the net interest margin, which were partially offset by higher average loan balances. Compared to the first quarter of 2013, net interest income decreased $12 million primarily due to a 14 basis point decline in the net interest margin, which was partially offset by higher average loan balances.

Net interest margin for the current quarter was 3.19%, a decrease of one basis point from the prior quarter, as the yield on loans declined three basis points. This was partially offset by a one basis point decline in interest-bearing deposit costs. The net interest margin decreased 14 basis points compared to the first quarter of 2013 primarily due to a 17 basis point decrease in earning asset yields, partially offset by a four basis point reduction in interest-bearing liability rates.

Noninterest Income

Noninterest income was $791 million for the current quarter compared to $814 million for the prior quarter and $863 million for the first quarter of 2013. Compared to the prior quarter, the $23 milliondecrease was primarily due to seasonal declines in service charges and investment banking income; however, also contributing to the decline was higher mark-to-market valuation losses on the Company's fair value debt, as well as declines in other income.  These declines were partially offset by an increase in mortgage-related income. Compared to the first quarter of 2013, the $72 milliondecrease was primarily due to reductions in mortgage production income, partially offset by increases in investment banking, mortgage servicing, and wealth management related income.

Mortgage production income for the current quarter was $43 million compared to $31 million for the prior quarter and $159 million for the first quarter of 2013. The $12 million sequential quarter increase was driven by a decline in the mortgage repurchase provision and higher mark-to-market valuation gains on certain loans carried at fair value, partially offset by a decline in origination fees. Mortgage production volume declined to $3.1 billion in the current quarter compared to $3.9 billion in the prior quarter primarily due to a reduction in refinance activity.  Compared to the first quarter of 2013, mortgage production income decreased $116 million due to a 65% decline in production volume and a decline in gain on sale margins. The mortgage repurchase provision was $5 million during the current quarter and the mortgage repurchase reserve was $83 million at March 31, 2014. 

Mortgage servicing income was $54 million in the current quarter compared to $38 million in both the prior quarter and the first quarter of 2013. The $16 million increase compared to the prior quarter was due to a slower pace of loan prepayments and improved net hedge performance, whereas the increase compared to the first quarter of 2013 was primarily due to a slower pace of loan prepayments. The servicing portfolio was $135 billion at March 31, 2014 compared to $142 billion at March 31, 2013.

Investment banking income was $88 million for the current quarter compared to $96 million in the prior quarter and $68 million in the first quarter of 2013. The $8 million sequential quarter decrease was driven by a seasonal decline in M&A advisory and equity offering fees, partially offset by higher loan syndication income.  The $20 million increase compared to the first quarter of 2013 was due to growth in loan syndication, M&A advisory, and equity offering fees.   

Trading income was $49 million for the current quarter compared to $57 million for the prior quarter and$42 million for the first quarter of 2013. The $8 million sequential quarter decrease was due to a $13 million increase in mark-to-market valuation losses on the Company's fair value debt, partially offset by a modest increase in other trading income. The $7 million increase compared to the first quarter of 2013 was primarily driven by a decline in mark-to-market valuation losses on the Company's fair value debt.

Other noninterest income was $38 million for the current quarter compared to $55 million for the prior quarter and $44 million for the first quarter of 2013. The $17 million sequential quarter decrease was partially driven by gains realized on certain asset sales in the fourth quarter of 2013.

Noninterest Expense

Noninterest expense for the current quarter was $1.4 billion which was stable compared to the prior quarter and the first quarter of 2013.  The current quarter included seasonally higher employee compensation and benefits expense and a $36 million impairment of certain legacy affordable housing assets.  Offsetting these cost increases in the current quarter were broad-based declines in almost all expense categories due to declines in cyclical costs and a continued focus on expense management. 

Employee compensation and benefits expense was $800 million in the current quarter compared to$723 million in the prior quarter and $759 million in the first quarter of 2013. The sequential quarter increase of $77 million was primarily the result of the seasonal increase in employee benefits and FICA taxes. The $41 million increase from the first quarter of 2013 was due to an incentive accrual reversal recorded in the first quarter of 2013 and higher salaries related to targeted hiring in certain businesses.

Operating losses were $21 million in the current quarter compared to $42 million in the prior quarter and $39 million in the first quarter of 2013. The decrease compared to both prior periods was due to lower costs associated with legacy mortgage and other legal related matters.

Outside processing and software expense was $170 million in the current quarter compared to $191 million in the prior quarter and $178 million in the first quarter of 2013.  The $21 million sequential quarter decrease was partially due to declines in vendor-related costs and lower utilization of third party services.  The $8 million decrease compared to the first quarter of 2013 was primarily due to lower mortgage production volume.

Marketing and customer development expense was $25 million in the current quarter compared to $40 million in the prior quarter and $30 million in the first quarter of 2013. The $15 million decrease compared to the prior quarter was due to seasonally higher advertising expenses during the fourth quarter. FDIC insurance and regulatory expense was $40 million in the current quarter compared to $41 million in the prior quarter and $54 million in the first quarter of 2013. The $14 million decrease compared to the first quarter of 2013 was due to a decrease in the assessment rate, reflecting the Company's reduced risk profile.

Other noninterest expense was $168 million in the current quarter compared to $187 million in the prior quarter and $153 million in the first quarter of 2013. The $19 million sequential quarter decrease was primarily driven by declines in collection, credit services, legal, and consulting expenses, partially offset by the aforementioned $36 million legacy asset impairment. The $15 million increase from the first quarter of 2013 was primarily driven by the aforementioned impairment charge.

Income Taxes

For the current quarter, the Company recorded an income tax provision of $125 million compared to$138 million for the prior quarter and $161 million for the first quarter of 2013. The effective tax rate was 24% in the current quarter compared to 25% in the prior quarter and 31% in the first quarter of 2013. The effective tax rate in the current and prior quarter was favorably impacted by certain discrete items.

Also during the current quarter, the Company adopted recently issued accounting guidance that resulted in the amortization expense of investments in low income housing properties being classified in the income tax provision, whereas the amortization was previously recorded in noninterest expense.  Prior periods have been restated to conform to this new accounting guidance, resulting in a reduction in noninterest expense and increase in income tax provision of $16 million and $10 million for the prior quarter and first quarter of 2013, respectively.  The adoption of the recently issued accounting guidance had no impact on net income or earnings per share.

Balance Sheet

At March 31, 2014, the Company had total assets of $179.5 billion and shareholders' equity of $21.8 billion, representing 12% of total assets. Book value per share was $39.44 and tangible book value per common share was $27.82, up 2% and 3%, respectively compared to December 31, 2013. The increase was primarily due to retained earnings growth.

Loans

Average performing loans were $127.6 billion for the current quarter, an increase of $2.9 billion, or 2%, from the prior quarter driven by a $2.1 billion, or 4%, increase in C&I loans and a $545 million, or 11%, increase in commercial real estate loans. Compared to the first quarter of 2013, average performing loans increased $8.2 billion, or 7%, with broad-based growth across most portfolios.

Deposits

Average client deposits for the current quarter were $128.4 billion compared to $127.5 billion in the prior quarter and $127.7 billion in the first quarter of 2013. Average client deposits increased $936 million during the current quarter due to a $1.2 billion, or 5%, increase in NOW balances, which was partially offset by a decline in average time deposit balances. Compared to the first quarter of 2013, average client deposits increased $741 million.  The growth was driven by increases of $1.3 billion in NOW account balances and $1.0 billion in demand deposits, and was partially offset by a $1.8 billion, or 12%, decrease in average time deposits.          

Capital and Liquidity

The Company's estimated capital ratios are well above current regulatory requirements with Tier 1 capital and Tier 1 common ratios at an estimated 10.85% and 9.90%, respectively, at March 31, 2014. The ratios of total average equity to total average assets and tangible equity to tangible assets were 12.28% and 9.01%, respectively, at March 31, 2014, both slightly increased compared to the prior quarter. The Company continues to have substantial available liquidity provided in the form of its client deposit base, cash, its portfolio of high-quality government-backed securities, and other available funding sources. 

During the first quarter, the Company declared a common stock dividend of $0.10 per common share, consistent with the prior quarter and up $0.05 per share from the first quarter of 2013. Additionally, during the current quarter, the Company repurchased $50 million of its common stock. 

In March, the Company announced that the Federal Reserve had completed its review of the Company's capital plan and did not object to the Company's capital plan.  The Company plans to repurchase up to $450 million of its common stock between the second quarter of 2014 and the first quarter of 2015.  Additionally, subject to Board approval, the Company intends to increase its quarterly common stock dividend to $0.20 per common share from the current $0.10 per common share, and maintain the current level of dividend payments on its preferred stock.

Asset Quality

Asset quality continued to improve as total nonperforming assets were $1.1 billion at March 31, 2014, declining 6% compared to the prior quarter. Nonperforming loans totaled $925 million at March 31, 2014, a decrease of 5% relative to the prior quarter.  At March 31, 2014, the percentage of nonperforming loans to total loans was 0.72%, a decrease from 0.76% and 1.21% at December 31, 2013 and March 31, 2013, respectively. Other real estate owned totaled $151 million at March 31, 2014, an 11% decrease from the prior quarter and a decrease of 32% from the prior year.       

Net charge-offs were $110 million during the current quarter compared to $128 million for the prior quarter and $226 million during the first quarter of 2013. The decrease in net charge-offs compared to the prior quarter and first quarter of 2013 was primarily driven by lower residential and commercial loan net charge-offs. The ratio of annualized net charge-offs to total average loans was 0.35% during the current quarter compared to 0.40% during the prior quarter and 0.76% during the first quarter of 2013. The provision for credit losses was $102 million, which was relatively stable compared to the prior quarter as improvements in asset quality were offset by loan growth.  The provision for credit losses declined $110 million from the first quarter of 2013 as the improvement in asset quality more than offset the impact of loan growth on the allowance for loan losses.

At March 31, 2014, the allowance for loan losses was $2.0 billion and represented 1.58% of total loans, a $4 million and two basis point decrease, respectively from December 31, 2013.  The slight decline in the allowance to total loans ratio was due to modest asset quality improvements in the first quarter.

Early stage delinquencies decreased seven basis points from the prior quarter to 0.67% at March 31, 2014. The decline was primarily due to consumer and mortgage loans. Excluding government-guaranteed loans, early stage delinquencies were 0.32%, down four basis points from the prior quarter.

Accruing restructured loans totaled $2.8 billion, and nonaccruing restructured loans totaled $0.4 billionat March 31, 2014, of which $2.9 billion of restructured loans related to residential loans, $0.1 billionwere commercial loans, and $0.1 billion related to consumer loans.

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Business Segment Results

The Company has included business segment 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 business segment tables is reported on a fully taxable-equivalent basis. For the business segments, results include net interest income, which is computed using matched-maturity funds transfer pricing. Further, provision for credit losses represents net charge-offs by segment combined with an allocation to the segments of the provision attributable to quarterly changes in the allowance for loan and lease losses and unfunded commitment 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 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, as well as equity and its related impact. A detailed discussion of the business segment results will be included in the Company's forthcoming Form 10-Q.