This summary is based on the second quarter fiscal 2007 earnings call conducted by SunTrust Banks, Inc. (STI) on July 19, 2007.
Management
Director of IR: Gregory W. Ketron
President and CEO: James M. Wells III
Chief Finance Officer: Mark A. Chancy
Chief Credit Officer: Thomas E. Freeman
Commercial Line of Business: Gay O. Abbott
Key Investors Issues
- The firm announced plans to employ a sale and lease back strategy involving 475 facilities.
- The bank reduced the size of its corporate loan book by $2 billion, and restructured asset sale of lower yielding large corporate loans.
- The bank partially liquidated its holding in the Coca Cola Company.
- The accelerated share repurchase agreement resulted in $800 million in shares being repurchased.
Fiscal Year to Date Performance
- Net income was up 11.8% from $1.08 billion in the prior year to $1.2 billion.
- EPS increased by 12.5% over prior year to $3.33.
- Loans rose from $118.2 million in the prior year to $119.8 million.
- Earnings assets marginally strengthened to $158.5 million.
Second Quarter Highlights
The E2 Efficiency and Productivity Program
- The E2 Efficiency and Productivity Program initiatives were responsible for keeping expense growth minimal. The positive operating leverage generated helped to offset the impact of higher credit cost, related to the normalization of credit trends.
- On implementation, due to the need to go deeper and faster than initial projections had indicated, the E2 initiative was expanded. Target cost savings were increased to $530 million for fiscal year 2009, representing over 10% of the current expense base.
- In addition, the firm has accelerated the implementation of this initiative with expected savings in 2007, increasing from $135 million to $181 million, and in 2008 from $205 million to $350 million.
- Cost savings to date totaled $80.6 million with $51.8 million in cost savings achieved in the second quarter alone.
Recent initiatives and wins associated with the E2 program:
- In corporate real estate, through rethinking office space utilization, the firm was able to reduce utilization by over 20%.
- Current efforts are aimed at using office space more efficiently by identifying and eliminating under utilized space and employing new space standards.
- All new buildings are being built with these revised standards and existing buildings are being retrofitted to new space standards in an orderly and systematic manner.
- The bank has been able to complete four large property transactions that involve both sell and lease back transactions as well as renegotiated longer-term leases, the most recent being the sale of the Laurel Maryland office building in late June.
- The Laurel Maryland transaction coupled with Atlanta Memphis and Orlando, represent aggregate annual savings of $13 million or 50% per year.
In June, the firm announced plans to employ a sale and lease back strategy, involving 475 facilities throughout the southeast and in the mid-Atlantic footprint, lowering overall occupancy expense and reduce under utilized office space.
- The firm is currently marketing 49 office buildings and 425 retail branches to developers, brokers, real estate investment trust and other institutional investments, with 500 registered interested parties, whose final bids are due by late September.
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With Process Reengineering, credit resource centers or CRC’s have been formed which are expected to transform the commercial lending process.
- The resource centers will leverage existing capabilities, infrastructure and processes to provide a streamlined and centralized loan closing and application process for clients with total borrower exposure of 2.5 million or less regardless of the customer revenue size.
- Following the streamlined credit processes, clients, employees and shareholders can expect to see an improved client experience and the elimination of the administrative task from the relationship managers, which will free them up to focus on client management and new client acquisition as well as reduction in headcount and expenses.
- The first pilot of this concept, in the Central Florida region was considered successful and additional pilots are being rolled out in the Georgia, Central Virginia, and Western Virginia regions.
Organizational review, which is the third E2 initiative, is on track to meet the summer timeline, and announcements on changes in the geographic units have been made.
- The structure has been fine tuned from four groups and 20 regions to more efficient three groups and 17 regions structure as well as the introduction of a more efficient approach to layers of management and spans of control.
- The bank is centralizing several back office operations and functions that have been performed at the region or group level, gaining consistency as well as scale.
Balance Sheet Management and Capital Optimization Strategies
- The review of the banks’ loan and investment portfolios concluded that it would be advantageous to reduce the overall size of the loan and investment portfolios, as well as modify the company''s investment portfolio to reduce the amounts of securities with credit exposure and increase the use of short term government securities to satisfy those collateral needs.
- In addition, it would ensure that the portfolio of securities will have lower risk ratings to consume less Tier 1 capital and increase the use of derivatives to manage duration and overall interest rate risk.
- Consequently, the firm sold $16 billion of available for sale investment securities and purchased $5 billion in mortgage backed securities with a longer duration and placed them in the AFS portfolio, purchased $7 billion in short term T-Bills that would be held in the trading account, pledging needs and the customer deposit.
Further, the bank entered into $7.5 billion of receipt fixed interest rate swaps to maintain the company''s overall balance sheet duration.
- On the loan side, the company reduced the size of its corporate loan book by $2 billion or 2% to $118.2 billion, and restructured asset sale of lower yielding large corporate loans.
- The decline was a result of balance sheet management strategies implemented in 2006 and accelerated in 2007, resulting in the sale of $10 billion loans, including $5.9 million in mortgage loans, $1.8 billion in student loans and $1.9 billion in corporate loans.
- In the mortgage portfolio, $4.1 billion of adjustable rate mortgages were transferred to loans held for sale for subsequent sale in the second and third quarters.
Revenue was $2.37 billion, up 15% from the prior year on strong net income growth
