This summary is based on the third quarter fiscal 2007 earnings call conducted by SunTrust Banks Inc. (STI) on October 18, 2007.
President and Chief Executive Officer: Jim Wells
Chief Financial Officer & EVP: Mark Chancy
Director of Investor Relations: Steve Shriner
Key Investors Issues
- The earnings per share dropped to $1.18 from $1.47 in the previous year.
- Quarterly revenue of $2,038.4 million was flat compared to last year.
- As of September 30, 2007, SunTrust had total assets of $175.9 billion.
Third Quarter Fiscal 2007 Financial Highlights
The company reported net income available to common shareholders of $412.6 million compared to $535.6 million in prior year.
Net income per average common diluted share was $1.18 compared to $1.47 in the third quarter of 2006. The results included approximately $161 million in net valuation losses, or 28 cents per diluted common share after tax, and $45 million in severance expenses, or 8 cents per diluted common share after tax.
The positive impact of continued expense discipline and continued net interest margin expansion was, as anticipated, offset by a decline in market value of certain financial assets held by SunTrust and severance expense related to an efficiency initiative. Third quarter results also reflected a higher provision for loan losses attributable to the deterioration in the credit environment.
During the quarter, the company recognized approximately $161 million in net valuation losses. The net losses pertained primarily to mark-to-market valuations on loan warehouses and trading assets and liabilities carried at fair value. Most of the losses are unrealized, and the company continues to evaluate alternatives in order to maximize the economic value of these assets. The after-tax earnings impact of the $161 million in net valuation losses was 28 cents per diluted common share.
The company also incurred $45 million in severance costs during the quarter. The severance costs are for employees impacted by the elimination of 2,400 jobs during 2007 and 2008. Approximately 1,000 employees were notified of position eliminations in late August. These positions were eliminated as part of the organization review aspect of the company''s broad-based E2 Efficiency and Productivity Program.
The revenue was $2,038.4 million for the third quarter of 2007, which was flat compared to the third quarter of 2006.
This was driven by net interest income growth that offset the decline in noninterest income. On a sequential annualized basis, fully taxable-equivalent revenue decreased 57% from the second quarter of 2007. Excluding securities gains and losses including the sale of The Coca-Cola Company stock in May 2007, fully taxable- equivalent revenue decreased 19% from the second quarter of 2007 on a sequential annualized basis primarily due to approximately $161 million of net valuation losses incurred in the third quarter of 2007.
The net interest income was $1,219.2 million in the third quarter of 2007, an increase of 4% from the third quarter of 2006.
Net interest margin for the third quarter of 2007 was 3.18%, a 25 basis point improvement from the third quarter of 2006. On a sequential annualized basis, fully taxable-equivalent net interest income was flat compared to the second quarter of 2007. However, net interest margin increased eight basis points from the second quarter of 2007, marking the third consecutive eight basis point sequential quarter improvement. The continued improvement in net interest margin was driven mainly by balance sheet management strategies executed in the first half of this year, which has resulted in improved yields on earning assets, as well as de-leveraging the balance sheet and reducing the level of higher-cost wholesale funding. Average earning asset yields increased 8 basis points compared to the second quarter of 2007, while average interest bearing liability costs declined 1 basis point resulting in a 9 basis point increase in the interest rate spread.
Total noninterest income was $819.1 million for the third quarter of 2007, down 5% from the third quarter of 2006.
The third quarter of 2006 included a $112.8 million gain, net of related expenses, on the sale of the Bond Trustee business, as well as $91.8 million in net securities losses resulting from the restructuring of a portion of the securities portfolio. The net impact of these transactions was a positive $21 million to total noninterest income in the third quarter of 2006. The other significant driver of the decline in noninterest income was the market value losses recognized on loan warehouses and trading assets carried at fair value.
Total noninterest expense in the third quarter of 2007 was $1,291.2 million, up 7% from the third quarter of 2006.
The third quarter of 2007 expense level was impacted by the following items:
- $49.5 million increase resulting from initial implementation costs associated with the E2 initiatives incurred in the third quarter of 2007, of which $45 million was due to severance charges associated with the organizational review component of the Company''s E2 Efficiency and Productivity Program. These initiatives generated $59.5 million of cost saves in the third quarter of 2007 and $140.1 million of cost saves thus far in 2007.
- Approximately $32 million increase in compensation expense related to the company''s election to record at fair value certain newly-originated mortgage loans held for sale. Under this election, costs associated with the origination of mortgage loans held for sale are recognized as a component of compensation expense when the loan is originated. Prior to the fair value election, these costs were deferred and recognized as part of the gain/loss on sale of the loan.
- $33.6 million decrease in the accrued liability associated with a capital instrument that the Company intends to call and replace in the fourth quarter.
- $9.8 million increase in other expense for the loss on early retirement of fixed rate debt that was carried at cost. The debt was not part of the Company''s fair value election as the interest on the debt was not being hedged.
Excluding the impact of the above items, expense growth was approximately 2.6% in the third quarter of 2007 relative to the same quarter last year, demonstrating the impact the E2 initiatives had on controlling expense growth. This incremental expense growth was driven by a $42.2 million increase in operating losses primarily related to application fraud associated with mortgage loans.
As of September 30, 2007, SunTrust had
total assets of $175.9 billion. Shareholders'' equity of $17.9 billion as of September 30, 2007, represented 10% of total assets. Book value per common share was $50.01 as of September 30, 2007.
