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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
Commission File Number 1-8918
SUNTRUST BANKS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1575035
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
303 Peachtree Street, N.E., Atlanta, Georgia 30308
(Address of principal executive offices) (Zip Code)
(404) 588-7711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
---
At April 30, 2001, 291,988,630 shares of the Registrant's Common Stock, $1.00
par value were outstanding.
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1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Shareholders' Equity 6-14
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 29
PART I - FINANCIAL INFORMATION
The following unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, in the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the full year
2001.
2
Consolidated Statements of Income
---------------------------------
Three Months
Ended March 31
-----------------------------
(Dollars in thousands except per share data)(Unaudited) 2001 2000
------------ ------------
Interest Income
Interest and fees on loans $ 1,397,659 $ 1,306,529
Interest and fees on loans held for sale 36,544 25,126
Interest and dividends on securities available for sale
Taxable interest 252,671 230,622
Tax-exempt interest 7,304 6,835
Dividends (1) 17,326 17,023
Interest on funds sold 18,933 19,338
Interest on deposits in other banks 435 335
Other interest 13,002 5,021
------------ ------------
Total interest income 1,743,874 1,610,829
------------ ------------
Interest Expense
Interest on deposits 584,261 554,962
Interest on funds purchased 154,430 142,833
Interest on other short-term borrowings 24,056 18,946
Interest on long-term debt 176,270 111,495
------------ ------------
Total interest expense 939,017 828,236
------------ ------------
Net Interest Income 804,857 782,593
Provision for loan losses 67,300 22,292
------------ ------------
Net interest income after provision for loan losses 737,557 760,301
------------ ------------
Noninterest Income
Trust income 124,309 128,600
Service charges on deposit accounts 120,023 111,266
Other charges and fees 55,539 49,137
Retail investment services 24,783 30,798
Investment banking income 14,089 19,671
Trading account profits and commissions 29,694 12,013
Credit card and other fees 25,588 22,091
Mortgage production related income 31,736 18,693
Mortgage servicing related income 6,724 7,722
Securities gains 57,117 6,862
Other noninterest income 36,317 29,999
------------ ------------
Total noninterest income 525,919 436,852
------------ ------------
Noninterest Expense
Salaries and other compensation 376,351 371,085
Employee benefits 56,660 56,924
Net occupancy expense 50,013 50,060
Equipment expense 44,545 51,638
Outside processing and software 45,144 41,611
Marketing and customer development 23,033 22,302
Merger-related expenses - 13,633
Amortization of intangible assets 8,290 8,994
Other noninterest expense 138,661 88,068
------------ ------------
Total noninterest expense 742,697 704,315
------------ ------------
Income before provision for income taxes 520,779 492,838
Provision for income taxes 183,254 173,399
------------ ------------
Net Income $ 337,525 $ 319,439
============ ============
Average common shares - diluted 295,832,464 306,738,634
Average common shares - basic 291,804,986 303,461,233
Net income per average common share - diluted $ 1.14 $ 1.04
Net income per average common share - basic 1.16 1.05
(1) Includes dividends on common stock of
The Coca Cola Company 8,688 8,205
See notes to consolidated financial statements
3
Consolidated Balance Sheets
---------------------------
March 31 December 31 March 31
(Dollars in thousands) (Unaudited) 2001 2000 2000
------------- ------------- ------------
Assets
Cash and due from banks $ 3,259,873 $ 4,110,489 $ 3,600,689
Interest-bearing deposits in other banks 242,371 13,835 14,962
Funds sold 996,791 1,267,028 1,021,249
Trading account 1,441,437 1,105,848 793,714
Securities available for sale (1) 20,274,510 18,810,311 17,184,884
Loans held for sale 2,537,483 1,759,281 1,121,702
Loans 70,360,077 72,239,820 68,614,360
Allowance for loan losses (871,964) (874,547) (874,034)
------------- ------------- ------------
Net loans 69,488,113 71,365,273 67,740,326
Premises and equipment 1,605,144 1,629,071 1,630,717
Intangible assets 868,541 810,860 780,677
Customers' acceptance liability 107,848 184,157 180,023
Other assets 2,904,274 2,604,221 2,249,962
------------- ------------- ------------
Total assets $ 103,726,385 $ 103,660,374 $ 96,318,905
============= ============= ============
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 13,532,170 $ 15,064,017 $ 13,807,141
Interest-bearing deposits 49,190,494 54,469,320 52,533,087
------------- ------------- ------------
Total deposits 62,722,664 69,533,337 66,340,228
Funds purchased 13,546,629 10,895,944 10,178,602
Other short-term borrowings 2,493,686 1,761,985 1,305,323
Long-term debt 11,475,889 7,895,430 6,618,392
Guaranteed preferred beneficial interests in debentures 1,050,000 1,050,000 1,050,000
Acceptances outstanding 107,848 184,157 180,023
Other liabilities 4,499,269 4,100,313 3,537,625
------------- ------------- ------------
Total liabilities 95,895,985 95,421,166 89,210,193
------------- ------------- ------------
Preferred stock, no par value; 50,000,000 shares authorized; none issued - - -
Common stock, $1.00 par value 323,163 323,163 323,163
Additional paid in capital 1,270,670 1,274,416 1,280,116
Retained earnings 6,531,995 6,312,044 5,667,767
Treasury stock and other (1,903,872) (1,613,189) (1,339,491)
------------- ------------- ------------
Realized shareholders' equity 6,221,956 6,296,434 5,931,555
Accumulated other comprehensive income 1,608,444 1,942,774 1,177,157
------------- ------------- ------------
Total shareholders' equity 7,830,400 8,239,208 7,108,712
------------- ------------- ------------
Total liabilities and shareholders' equity $ 103,726,385 $ 103,660,374 $ 96,318,905
============= ============= ============
Common shares outstanding 291,808,231 296,266,329 302,325,563
Common shares authorized 750,000,000 750,000,000 500,000,000
Treasury shares of common stock 31,354,526 26,896,428 20,837,194
(1) Includes net unrealized gains on securities available for sale $ 2,509,185 $ 3,048,313 $ 1,903,368
4
Consolidated Statements of Cash Flows
-------------------------------------
Three Months
Ended March 31
---------------------------
(Dollars in thousands) (Unaudited) 2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 337,525 $ 319,439
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation, amortization and accretion 77,226 75,774
Provisions for loan losses and foreclosed property 67,419 22,315
Amortization of compensation element of restricted stock 1,050 2,682
Securities gains (57,117) (6,862)
Net gain on sale of non-interest earning assets (3,124) (5,921)
Originated loans held for sale (3,873,540) (1,720,872)
Sales of loans held for sale 3,095,339 2,130,957
Net increase in accrued interest receivable,
prepaid expenses and other assets (765,758) (539,094)
Net increase in accrued interest payable,
accrued expenses and other liabilities 603,754 216,044
----------- -----------
Net cash (used in) provided by operating activities (517,226) 494,462
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 523,480 776,165
Proceeds from sales of securities available for sale 1,168,211 88,353
Purchases of securities available for sale (1,739,622) (353,785)
Net increase in loans (147,545) (2,631,603)
Proceeds from sales of loans 69,400 -
Capital expenditures (8,399) (30,599)
Proceeds from the sale of assets 7,238 9,676
Loan recoveries 13,027 15,728
----------- -----------
Net cash used in investing activities (114,210) (2,126,065)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits (6,810,673) 6,239,699
Net increase (decrease) in funds purchased
and other short-term borrowings 3,382,386 (6,687,002)
Proceeds from the issuance of long-term debt 4,100,000 2,461,529
Repayment of long-term debt (519,541) (810,483)
Proceeds from the exercise of stock options 1,710 4,276
Proceeds from stock issuance 7,938 8,576
Proceeds used in the acquisition of stock (305,127) (354,435)
Dividends paid (117,574) (113,023)
----------- -----------
Net cash (used in) provided by financing activities (260,881) 749,137
----------- -----------
Net decrease in cash and cash equivalents (892,317) (882,466)
Cash and cash equivalents at beginning of year 5,391,352 5,519,366
----------- -----------
Cash and cash equivalents at end of period $ 4,499,035 $ 4,636,900
=========== ===========
Supplemental Disclosure:
Interest paid $ 939,340 $ 812,475
Income taxes refunded (paid) 41,562 (26,349)
Non-cash impact of securitizing loans 1,903,518 -
Non-cash impact of Star Systems Inc. sale 52,919 -
See notes to consolidated financial statements
5
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
Accumulated
Additional Treasury Other
Common Paid in Retained Stock and Comprehensive
(Dollars in thousands) (Unaudited) Stock Capital Earnings Other* Income Total
------------------------------------------------------------------------------
Balance, January 1, 2000 $323,163 $ 1,293,387 $5,461,351 $(1,013,861) $1,562,822 $ 7,626,862
Net income - - 319,439 - - 319,439
Other comprehensive income:
Change in unrealized gains (losses) on
securities, net of taxes - - - - (385,665) (385,665)
-----------
Total comprehensive income (66,226)
Cash dividends declared, $0.37 per share - - (113,023) - - (113,023)
Exercise of stock options - (11,057) - 15,333 - 4,276
Acquisition of treasury stock - - - (354,435) - (354,435)
Restricted stock activity - (328) - 328 - -
Amortization of compensation element
of restricted stock - - - 2,682 - 2,682
Issuance of stock for employee benefit plans - (1,886) - 10,462 - 8,576
------------------------------------------------------------------------------
Balance, March 31, 2000 $323,163 $ 1,280,116 $5,667,767 $(1,339,491) $1,177,157 $ 7,108,712
==============================================================================
Balance, January 1, 2001 $323,163 $ 1,274,416 $6,312,044 $(1,613,189) $1,942,774 $ 8,239,208
Net income - - 337,525 - - 337,525
Other comprehensive income:
Adoption of SFAS No. 133 - - - - (10,560) (10,560)
Change in unrealized gains (losses) on
derivatives, net of taxes - - - - (11,611) (11,611)
Change in unrealized gains (losses) on
securities, net of taxes - - - - (312,159) (312,159)
-----------
Total comprehensive income 3,195
Cash dividends declared, $0.40 per share - - (117,574) - - (117,574)
Exercise of stock options - (3,951) - 5,661 - 1,710
Acquisition of treasury stock - - - (305,127) - (305,127)
Restricted stock activity - (123) - 123 - -
Amortization of compensation element
of restricted stock - - - 1,050 - 1,050
Issuance of stock for employee benefit plans - 328 - 7,610 - 7,938
------------------------------------------------------------------------------
Balance, March 31, 2001 $323,163 $ 1,270,670 $6,531,995 $(1,903,872) $1,608,444 $ 7,830,400
==============================================================================
* Balance at March 31, 2000 includes $1,285,467 for treasury stock and $54,024
for compensation element of restricted stock.
Balance at March 31, 2001includes $1,862,702 for treasury stock and $41,170
for compensation element of restricted stock.
See notes to consolidated financial statements
6
Notes to Consolidated Financial Statements (Unaudited)
------------------------------------------------------
Note 1 - Accounting Policies
The consolidated interim financial statements of SunTrust Banks, Inc.
("SunTrust" or "Company") are unaudited. All significant intercompany accounts
and transactions have been eliminated. These financial statements should be read
in conjunction with the Annual Report on Form 10-K for the year ended December
31, 2000. Certain reclassifications have been made to prior year amounts to
conform with the current year presentation.
Note 2 - Acquisitions
On March 28, 2001, the Company acquired Asset Management Advisors Holdings,
Inc., a Jupiter, Florida based specialized wealth management firm. The
acquisition was accounted for as a purchase with $22.0 million of cash tendered
as consideration. The acquisition did not have a material effect on the
consolidated financial statements.
Note 3 - Derivative Financial Instruments
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133, as amended, standardizes the
accounting for derivative instruments and hedging activities and requires that
all derivative instruments be recognized as assets or liabilities at fair value.
If certain conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment ("fair value hedge"), (b) a hedge of the
exposure to variability of cash flows of a recognized asset, liability or
forecasted transaction ("cash flow hedge") or (c) a hedge of foreign currency
exposure ("foreign currency hedge").
In the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in current
period earnings along with the change in value of the designated hedge item. In
the case of a qualifying cash flow hedge, changes in the value of the derivative
instruments that have been highly effective are recognized in other
comprehensive income, until such time that earnings are affected by the
variability of the cash flows of the underlying hedged item. In either a fair
value hedge or a cash flow hedge, net earnings may be impacted to the extent the
changes in the value of the derivative instruments do not perfectly offset
changes in the value of the hedge items. The Company does not currently have any
foreign currency hedges. All derivatives that qualify for hedge accounting
treatment have been used to hedge the issuance of long term debt and qualify for
the short-cut method of accounting as described in SFAS 133. Accordingly, no
income or expense was recorded in the first quarter of 2001 due to hedge
ineffectiveness.
Certain interest rate swaps were entered into for the purpose of hedging balance
sheet items prior to 2001 that do not meet the requirements for the short-cut
method of accounting under the provisions of SFAS 133. These swaps have been
recorded at fair value as trading account assets or liabilities. The related net
gain is recorded in current period earnings as trading income. Trading account
profits and commissions included $2.9 million related to these derivatives in
the first quarter of 2001.
The Company adopted SFAS 133 on January 1, 2001. In accordance with the
transition provisions of SFAS 133, the following was the net-of-tax effect on
earnings and equity effective January 1, 2001:
7
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Earnings increased $1.6 million
-------------------------------
. $16.6 million gain for the fair value adjustment on fair-value hedging
instruments
. $16.6 million loss for the fair value adjustment on related hedged assets and
liabilities
. $0.4 million gain for the fair value on the
mortgage pipeline
. $1.2 million gain for the derecognition of a previously deferred gain
The fair value adjustments have been recorded in the same category of the
income statement as the income or expense related to the hedged asset or
liability.
Equity (Other Comprehensive Income)
-----------------------------------
. $10.6 million loss from cash flow hedging instruments
In the first quarter of 2001, the Company recorded a gain of $18.5 million for
the market value adjustment on fair value hedging instruments related to
long-term debt that was offset by an $18.5 million loss for the market value
adjustment of the hedged long-term debt. The Company also recorded a gain of
$5.9 million for the market value adjustment on fair value hedging instruments
related to mortgage loans that was offset by a $5.9 million loss for the market
value adjustment on mortgage loans. Cash flow hedges of long-term debt resulted
in a decrease to other comprehensive income for the first quarter of 2001 of
$13.6 million. Activity in other comprehensive income for the first quarter of
2001 is summarized in the following table:
(Dollars in thousands) Three Months Ended March 31, 2001
-------------------------------------------
Before Income Tax Net of
Tax (Expense) Tax
Amount or Benefit Amount
---------- ---------- ----------
Balance at December 31, 2000 $ - $ - $ -
Cumulative effect of a change in accounting principle (16,246) 5,686 (10,560)
Reclassification of losses to net income 3,036 (1,063) 1,973
Net loss on current period cash flow hedges (20,899) 7,315 (13,584)
---------- ---------- ----------
Balance at March 31, 2001 $ (34,109) $ 11,938 $ (22,171)
========== ========== ==========
Currently all of the Company's cash flow hedges qualify for the short-cut method
of evaluating effectiveness and, accordingly, no charges for ineffectiveness are
necessary. As of March 31, 2001, $10.4 million of existing losses are expected
to be reclassified from accumulated other comprehensive income into earnings
over the next 12 months.
8
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Note 4 - Guaranteed Preferred Beneficial Interests in Debentures
SunTrust has established special purpose trusts, which collectively issued
$1,050 million in trust preferred securities. The proceeds from these issuances,
together with the proceeds of the related issuances of common securities of the
trusts, were invested in junior subordinated deferrable interest debentures of
SunTrust. The sole assets of these special purpose trusts are the debentures.
These debentures rank junior to the senior and subordinated debt of the issuing
company. SunTrust owns all of the common securities of the special purpose
trusts. The preferred securities issued by the trusts rank senior to the trusts'
common securities. The Company's obligations under the debentures, the
indentures, the relevant trust agreements and the guarantees, in the aggregate,
constitute a full and unconditional guarantee by SunTrust of the obligations of
the trusts under the trust preferred securities and rank subordinate and junior
in right of payment to all liabilities of the Company. The trust preferred
securities may be called prior to maturity at the option of SunTrust.
Note 5 - Loan Securitizations
During the first quarter of 2001, SunTrust transferred $1,903 million of single
family mortgages to securities available for sale in two securitization
transactions. These securities are maintained in the Company's available for
sale securities portfolio at fair market value based on quoted market prices.
The first securitization of $468 million is guaranteed by Fannie Mae with
SunTrust retaining one-percent recourse on the losses incurred in the
securitized loan portfolio. The second securitization of $1,435 million is a
private securitization with the Company retaining full recourse. Reserves
totaling $3.6 million were transferred from the allowance for loan losses to
other liabilities to provide for any potential recourse liability. The reserve
was established based on management's evaluation of the size and risk
characteristics of the securitized loan portfolio. The reserve is periodically
evaluated by management for adequacy, with consideration given to the balance of
problem loans, prior loan loss experience, current economic conditions, value of
collateral and other risk factors.
Note 6 - Comprehensive Income
The Company's comprehensive income, which includes certain transactions and
other economic events that bypass the income statement, consists of net income,
unrealized gains and losses on securities available for sale and the impact of
cash flow hedges, net of income taxes.
9
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Comprehensive income for the three months ended March 31, 2001 and 2000 is
calculated as follows:
(Dollars in thousands)
2001 2000
---- ----
Unrealized loss on available for sale securities, net,
recognized in other comprehensive income:
Before income tax $ (480,245) $ (624,337)
Income Tax (168,086) (238,672)
---------- ----------
Net of Income Tax $ (312,159) $ (385,665)
========== ==========
Amounts reported in net income:
Gain on sale of securities $ 57,117 $ 6,862
Net accretion (1,881) (2,285)
---------- ----------
Reclassification adjustment 55,236 4,577
Income tax expense (19,333) (1,750)
---------- ----------
Reclassification adjustment, net of tax $ 35,903 $ 2,827
========== ==========
Unrealized loss on available for sale securities
arising during period, net of tax $ (276,256) $ (382,838)
Reclassification adjustment, net of tax (35,903) (2,827)
---------- ----------
Net unrealized loss on available for sale securities
recognized in other comprehensive income $ (312,159) $ (385,665)
========== ==========
Unrealized loss on derivative financial instruments, net,
recognized in other comprehensive income:
Before income tax $ (34,109) $ -
Income Tax (11,938) -
---------- ----------
Net of Income Tax $ (22,171) $ -
========== ==========
Cumulative effect change in accounting principle $ (16,246) $ -
Income tax benefit 5,686 -
---------- ----------
Cumulative effect change in accounting principle,
net of tax $ (10,560) $ -
========== ==========
Reclassification of losses from other comprehensive
income to earnings $ 3,036 $ -
Income tax expense (1,063) -
---------- ----------
Reclassification adjustment, net of tax $ 1,973 $ -
========== ==========
Cumulative effect change in accounting principle,
net of tax $ (10,560) $ -
Unrealized loss on derivative financial instruments
arising during period, net of tax (13,584) -
Reclassification adjustment, net of tax 1,973 -
---------- ----------
Net unrealized loss on derivative instruments
recognized in other comprehensive income $ (22,171) $ -
========== ==========
Total unrealized losses recognized in
other comprehensive income $ (334,330) $ (385,665)
Net income 337,525 319,439
---------- ----------
Total comprehensive income $ 3,195 $ (66,226)
========== ==========
10
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Note 7 - Earnings Per Share Reconciliation
Net income is the same in the calculation of basic and diluted EPS. Shares of
3.7 million and 4.7 million for the periods ended March 31, 2001 and 2000,
respectively, were excluded in the computation of diluted EPS because they would
have been antidilutive. A reconciliation of the difference between average basic
common shares outstanding and average diluted common shares outstanding for the
three months ended March 31, 2001 and 2000 is included in the following table.
Computation of Per Share Earnings
(In thousands, except per share data)
Three Months
Ended March 31
-------------------------
2001 2000
--------- ---------
Diluted
-------
Net income $ 337,525 $ 319,439
--------- ---------
Average common shares outstanding 291,805 303,461
Effect of dilutive securities:
Stock options 2,140 1,511
Performance restricted stock 1,887 1,767
--------- ---------
Average diluted common shares 295,832 306,739
--------- ---------
Earnings per common share - diluted $ 1.14 $ 1.04
========= =========
Basic
-----
Net income $ 337,525 $ 319,439
--------- ---------
Average common shares 291,805 303,461
--------- ---------
Earnings per common share - basic $ 1.16 $ 1.05
========= =========
11
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Note 8 - Business Segment Reporting
The Company's prior business segment disclosures have been aligned with its
geographic regions as defined by its former multiple bank charters. During 2000,
as a result of the consolidation of its multiple bank charters into a single
legal entity, the Company began to redefine its operating model and created a
line of business management structure to overlay its former multiple bank
management structure. Beginning in January 2001, the Company implemented
significant changes to its internal management reporting system to begin to
measure and manage certain business activities by line of business. The Lines of
Business are defined as follows:
Retail
Retail includes loans, deposits and other fee based services for retail and
small business clients. The Retail Line of Business also includes the branch
office and ATM networks of the Company.
Commercial
Commercial includes loans, deposits and other fee based services for business
clients generally with total annual revenues from $5 million to $250 million.
Corporate and Investment Banking
Corporate and Investment Banking includes loans, deposits and other fee based
services for national and large business clients generally with total annual
revenues in excess of $250 million. Corporate and Investment Banking also
includes the management of corporate leasing, debt and equity capital markets
and international banking services.
Mortgage
Mortgage includes the investment in residential mortgage loans and the
production, sale and service of secondary residential mortgage loans.
Private Client Services
Private Client Services includes personal and institutional trust and investment
management services, retail investment services and management of affluent
clients' financial resources including loans, deposits and other fee based
services.
Corporate/Other
Corporate/Other includes the investment securities portfolio, long-term debt,
capital, derivative instruments, short-term liquidity and funding activities,
balance sheet risk management, office premises and certain support activities
not currently allocated to the aforementioned Lines of Business. Any
transactions between the separate Lines of Business not already eliminated in
the results of the Lines of Business are also reflected in the Corporate/Other
Line of Business.
12
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Unlike financial accounting, there is no comprehensive authoritative body of
guidance for management accounting practices equivalent to generally accepted
accounting principles. Therefore, the disclosure of performance of the business
segments is not necessarily comparable with similar information presented by any
other financial institution.
The Company utilizes a matched maturity funds transfer pricing methodology to
transfer the interest rate risk of all assets and liabilities to the Corporate
Treasury area which manages the interest rate risk of the Company. Differences
in the aggregate amounts of funds charges and credits that are transfer priced
are reflected in the Corporate/Other Line of Business segment. A system of
internal credit transfers is utilized to recognize supportive business services
across Lines of Business. The net results of these credits are reflected in each
Line of Business segment. The cost of operating office premises is charged to
the Lines of Business by use of an internal cost transfer process. Allocations
of certain administrative support expenses and customer transaction processing
expenses are also reflected in each Line of Business segment. The offset to
these expense allocations, as well as the amount of any unallocated expenses, is
reported in the Corporate/Other Line of Business segment. The Company also
utilizes an internal credit risk transfer pricing methodology (the "credit risk
premium") which creates a current period financial charge against interest
income to each Line of Business based on the estimated credit risk-adjusted
return on loans and leases. The offset to the aggregate credit risk premium
charges is matched against the Company's current provision for loan and lease
losses with any difference reported in the Corporate/Other segment. The
provision for income taxes is also reported in the Corporate/Other segment.
The Company is currently in the process of building and implementing further
enhancements to its internal management reporting system which are expected to
be implemented over the remaining periods of 2001. Once complete, the activities
reported for each Line of Business segment are expected to include: assets,
liabilities and attributed economic capital; matched maturity funds transfer
priced interest income, net of credit risk premiums; direct non-interest income;
Internal credit transfers between Lines of Business for supportive business
services; and fully absorbed expenses. The internal management reporting system
and the business segment disclosures for each Line of Business do not currently
include attributed economic capital, nor fully absorbed expenses. Any amounts
not currently reported in each Line of Business segment are reported in the
Corporate/Other segment. The implementation of these enhancements to the
internal management reporting system is expected to materially affect the net
income disclosed for each segment.
Due to the significant nature of the changes implemented to the internal
management reporting system in 2001, it is not practicable to conform prior year
financial data for the new business segments nor current year financial data for
the prior business segments for reporting.
13
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
The following table discloses selected financial information for SunTrust's new
reportable business segments for the three months ended March 31, 2001.
Three Months Ended March 31, 2001
-------------------------------------------------------------------------------------------
Corporate and
Investment Private Client Corporate/
Retail Commercial Banking Mortgaging Servives Other Consolidated
-------------------------------------------------------------------------------------------
Average total assets 19,958,455 19,994,114 22,601,902 19,430,534 1,295,794 19,944,567 103,225,366
Average total liabilities 44,464,646 8,157,788 4,294,637 753,246 1,720,683 35,745,148 95,136,148
Average total equity - - - - - 8,089,218 8,089,218
-------------------------------------------------------------------------------------------
Net interest revenue (1) 398,693 135,559 50,229 41,642 11,042 100,392 737,557
Noninterest revenue 146,265 55,056 71,815 55,994 150,332 46,457 525,919
Noninterest expense 289,698 95,168 70,296 72,104 100,491 114,940 742,697
-------------------------------------------------------------------------------------------
Total contribution 255,260 95,447 51,748 25,532 60,883 31,909 520,779
Provision for income taxes - - - - - 183,254 183,254
-------------------------------------------------------------------------------------------
Net income 255,260 95,447 51,748 25,532 60,883 (151,345) 337,525
===========================================================================================
Total revenue from external customers 545,178 406,113 424,889 382,421 154,889 356,303 2,269,793
===========================================================================================
(1) Net interest income is fully taxable equivalent and is presented on a
matched maturity funds transfer price basis net of the credit risk premium
for the Lines of Business.
14
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
SunTrust Banks, Inc. is a financial holding company with its headquarters in
Atlanta, Georgia. SunTrust's principal banking subsidiary, SunTrust Bank, offers
a full line of financial services for consumers and businesses through its
branches located primarily in Alabama, Florida, Georgia, Maryland, Tennessee,
Virginia and the District of Columbia. In addition to traditional deposit,
credit and trust and investment services offered by SunTrust Bank, other
SunTrust subsidiaries provide mortgage banking, commercial and auto leasing,
credit-related insurance, asset management, securities brokerage and investment
banking services.
SunTrust has 1,115 full-service branches, including supermarket branches, and
continues to leverage technology to provide customers the convenience of banking
on the Internet, through 1,950 automated teller machines and via twenty-four
hour telebanking.
The following analysis of the financial performance of SunTrust for the first
quarter of 2001 should be read in conjunction with the financial statements,
notes and other information contained in this document. SunTrust has made, and
may continue to make, various forward-looking statements with respect to
financial and business matters. These forward-looking statements are subject to
numerous assumptions, risks and uncertainties, all of which may change over
time. The actual results that are achieved could differ significantly from the
forward-looking statements contained in this document.
The results of operations for the three months ended March 31, 2001 are not
indicative of the results that may be attained for any other period. In this
discussion, net interest income and the net interest margin are presented on a
taxable-equivalent basis and the ratios are presented on an annualized basis.
EARNINGS ANALYSIS
SunTrust reported record operating earnings of $337.5 million for the first
quarter of 2001, an increase of 2.8% compared to $328.3 million for the first
quarter of 2000 (excluding after-tax merger-related charges of $8.9 million or
$.03 per diluted share for the first quarter of 2000). Diluted earnings per
share, adjusted for merger charges, grew 6.5% to $1.14 from $1.07 in the same
period last year.
Net interest income increased $23.1 million, or 2.9%, from the first quarter of
2000 to the first quarter of 2001. This was the result of continued strong loan
demand as average quarterly loans increased $4.6 billion, or 6.9%, over the
first quarter of 2000.
The loan loss provision increased $45.0 million, or 201.9%, over the first
quarter of 2000. This increase was primarily due to the first quarter of 2001
sale of three of the Company's largest nonperforming loans which resulted in
losses of $11.7 million. Additional write-downs of other large corporate
nonperforming loans also contributed to this increase.
Total noninterest income increased $89.1 million, or 20.4%, over the prior
year's first quarter. The majority of the increase was due to the recognition of
a $52.9 million gain on the sale of Star Systems, Inc. in the first quarter of
2001. In addition, noninterest income was impacted by increases of $17.7
million, or 147.2%, in trading account profits and commissions, $13.0 million,
or 69.8%, in mortgage production related income, $8.8 million, or 7.9%, in
services charges on deposit accounts and $6.4 million, or 13.0%, in other
charges and fees.
15
Total noninterest expense, excluding merger-related charges, increased $52.0
million, or 7.5%, over the first quarter of 2000. The overall increase was
primarily the result of a $55.6 million increase in the other expense line item
primarily due to increases in miscellaneous one-time expenses including the
Company's branding advertising campaign and $7.0 million related to the
continued system integration of customer based systems across the geographic
areas served by SunTrust Banks, Inc.(One Bank initiative).
Selected Quarterly Financial Data Table 1
(Dollars in millions except per share data) Quarters
-------------------------------------------------------------------
2001 2000
----------- -----------------------------------------------------
1 4 3 2 1
----------- ----------- ----------- ---------- ----------
Summary of Operations
Interest and dividend income $ 1,743.9 $ 1,798.3 $ 1,764.2 $ 1,672.0 $ 1,610.8
Interest expense 939.0 1,012.9 992.8 903.0 828.2
----------- ----------- ----------- ---------- ----------
Net interest income 804.9 785.4 771.4 769.0 782.6
Provision for loan losses 67.3 53.5 30.5 27.7 22.3
----------- ----------- ----------- ---------- ----------
Net interest income after
provision for loan losses 737.6 731.9 740.9 741.3 760.3
Noninterest income 525.9 445.6 447.2 444.0 436.9
Noninterest expense(1)(2) 742.7 697.9 706.6 719.8 704.2
----------- ----------- ----------- ---------- ----------
Income before provision for
income taxes 520.8 479.6 481.5 465.5 493.0
Provision for income taxes 183.3 149.2 154.7 148.0 173.6
----------- ----------- ----------- ---------- ----------
Net income $ 337.5 $ 330.4 $ 326.8 $ 317.5 $ 319.4
=========== =========== =========== ========== ==========
Net interest income (taxable-equivalent) $ 815.2 $ 796.1 $ 781.5 $ 778.7 $ 792.1
Per common share
Diluted $ 1.14 $ 1.11 $ 1.10 $ 1.05 $ 1.04
Basic 1.16 1.13 1.11 1.06 1.05
Dividends declared 0.40 0.37 0.37 0.37 0.37
Book value 26.83 27.81 25.85 25.10 23.51
Market price
High 68.07 64.38 54.19 66.00 68.06
Low 57.29 41.63 45.63 45.06 46.81
Close 64.80 63.00 49.88 45.69 57.75
Selected Average Balances
Total assets $ 103,225.4 $ 101,246.0 $ 99,392.2 $ 97,497.3 $ 95,413.4
Earning assets 92,553.9 90,679.6 89,663.7 88,200.6 85,857.5
Loans 71,654.4 71,774.6 71,506.9 69,830.6 67,030.0
Total deposits(3) 65,408.6 67,181.9 67,158.2 66,866.4 65,550.3
Realized shareholders' equity 6,264.6 6,140.5 6,012.8 5,948.9 6,023.3
Total shareholders' equity 8,089.2 7,844.4 7,487.4 7,195.9 7,476.2
Common shares - diluted (thousands) 295,832 296,461 298,558 302,141 306,739
Common shares - basic (thousands) 291,805 293,390 295,575 298,986 303,461
Financial Ratios(4)
ROA 1.36% 1.33% 1.34% 1.34% 1.38%
Return on average realized shareholders'
equity 21.85 21.40 21.62 21.46 21.33
Return on average total shareholders'
equity 16.92 16.75 17.36 17.74 17.18
Net interest margin 3.57 3.49 3.47 3.55 3.71
(1) Includes enhancements to customer-based systems of $7.0 million for the
first quarter of 2001 related to the One Bank initiative.
(2) Includes merger-related expenses of $2.4, $8.3, $18.2 and $13.6 million for
the fourth, third, second and first quarters of 2000, respectively.
(3) Includes brokered and foreign deposits of $10.9 billion for the first
quarter of 2001 and $13.1, $13.5, $12.9 and $12.2 billion for the fourth,
third, second and first quarters of 2000, respectively.
(4) In this report, SunTrust presents a return on average realized shareholders'
equity, as well as a return on average total shareholders' equity. The
return on average realized shareholders' equity excludes net unrealized
security gains. Due to its ownership of 48 million shares of common stock of
The Coca-Cola Company resulting in an unrealized net gain of $1.4 billion,
the Company believes that this measure is more indicative of its return on
average shareholders' equity when comparing performance to other
companies.
16
Consolidated Daily Average Balances, Income/Expense
and Average Yields Earned and Rates Paid
(Dollars in millions; yields on taxable-equivalent basis)
Quarter Ended
---------------------------------------------------------------------------
March 31, 2001 December 31, 2000
------------------------------------- ----------------------------------
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
------------ ----------- --------- ------------ --------- -------
Assets
Loans:(1)
Taxable $ 70,552.3 $ 1,385.0 7.96% $ 70,647.7 $ 1,461.7 8.23%
Tax-exempt(2) 1,102.1 20.9 7.68 1,126.9 22.5 7.93
-------------------------------------- ----------------------------------
Total loans 71,654.4 1,405.9 7.96 71,774.6 1,484.2 8.23
Securities available for sale:
Taxable 15,920.2 270.0 6.88 14,715.5 251.2 6.79
Tax-exempt(2) 449.6 9.4 8.44 444.0 8.4 7.53
-------------------------------------- ----------------------------------
Total securities available for sale 16,369.8 279.4 6.92 15,159.5 259.6 6.81
Funds sold 1,361.1 18.9 5.64 1,324.4 22.3 6.70
Loans held for sale 1,988.3 36.5 7.45 1,690.7 33.3 7.83
Other short-term investments(2) 1,180.3 13.6 4.66 730.4 9.6 5.24
-------------------------------------- ----------------------------------
Total earning assets 92,553.9 1,754.3 7.69 90,679.6 1,809.0 7.94
Allowance for loan losses (896.7) (858.6)
Cash and due from banks 3,321.7 3,464.7
Premises and equipment 1,617.1 1,618.2
Other assets 3,761.5 3,661.1
Unrealized gains on securities
available for sale 2,867.9 2,681.0
-------------------------------------- ----------------------------------
Total assets $ 103,225.4 $ 101,246.0
====================================== ==================================
Liabilities and Shareholders' Equity
Interest-bearing deposits:
NOW/Money market accounts $ 21,172.9 $ 173.5 3.32% $ 20,023.3 $ 169.3 3.36%
Savings 6,251.4 56.6 3.67 6,306.9 60.8 3.84
Consumer time 9,741.0 135.7 5.65 9,964.6 141.5 5.65
Other time 4,235.1 62.1 5.95 4,334.7 66.4 6.09
Brokered deposits 2,490.3 39.2 6.38 4,059.7 68.6 6.72
Foreign deposits 8,379.7 117.2 5.67 9,023.0 149.6 6.60
-------------------------------------- ----------------------------------
Total interest-bearing deposits 52,270.4 584.3 4.53 53,712.2 656.2 4.86
Funds purchased 11,834.6 154.4 5.29 11,225.2 177.5 6.29
Other short-term borrowings 1,724.3 24.1 5.66 1,885.9 31.2 6.57
Long-term debt 11,688.5 176.3 6.12 8,725.0 148.0 6.75
-------------------------------------- ----------------------------------
Total interest-bearing liabilities 77,517.8 939.1 4.91 75,548.3 1,012.9 5.33
Noninterest-bearing deposits 13,138.2 13,469.7
Other liabilities 4,480.1 4,383.6
Realized shareholders' equity 6,264.6 6,140.5
Accumulated other comprehensive income 1,824.7 1,703.9
-------------------------------------- ----------------------------------
Total liabilities and shareholders' equity $ 103,225.4 $ 101,246.0
====================================== ==================================
Interest rate spread 2.78% 2.61%
-------------------------------------- ----------------------------------
Net Interest Income $ 815.2 $ 796.1
-------------------------------------- ----------------------------------
Net Interest Margin(3) 3.57% 3.49%
-------------------------------------- ----------------------------------
(1) Interest income includes loan fees of $36.0, $36.8, $33.5, $32.8, and $32.4
million in the quarters ended March 31, 2001 and December 31, September 30,
June 30, and March 31, 2000, respectively. Nonaccrual loans are included in
average balances and income on such loans, if recognized, is recorded on a
cash basis.
(2) Interest income includes the effects of taxable-equivalent adjustments
(reduced by the nondeductible portion of interest expense) using a federal
income tax rate of 35% and, where applicable, state income taxes, to
increase tax-exempt interest income to a taxable-equivalent basis. The net
taxable-equivalent adjustment amounts included in the above table
aggregated $10.4, $10.7, $10.1, $9.6, and $9.5 million in the quarters
ended March 31, 2001 and December 31, September 30, June 30, and March 31,
2000, respectively.
17
Table 2
Quarter Ended
--------------------------------------------------------------------------------------------------------
September 30, 2000 June 30, 2000 March 31, 2000
--------------------------------- --------------------------------- ----------------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
----------- --------- ------- ----------- ----------- ------- ----------- ----------- -------
$ 70,427.3 $ 1,442.1 8.15% $ 68,789.8 $ 1,354.7 7.92% $ 65,975.8 $ 1,293.9 7.89%
1,079.6 21.1 7.79 1,040.8 19.8 7.65 1,054.2 19.6 7.48
-------------------------------- -------------------------------- ----------------------------------
71,506.9 1,463.2 8.14 69,830.6 1,374.5 7.92 67,030.0 1,313.5 7.88
14,146.9 239.9 6.75 14,483.6 242.7 6.74 15,032.5 247.6 6.63
456.5 8.7 7.59 470.0 8.9 7.65 508.5 9.4 7.42
-------------------------------- -------------------------------- ----------------------------------
14,603.4 248.6 6.77 14,953.6 251.6 6.77 15,541.0 257.0 6.65
1,587.2 26.7 6.68 1,537.5 24.5 6.41 1,309.5 19.3 5.94
1,395.0 28.5 8.12 1,279.7 23.7 7.45 1,437.1 25.1 7.03
571.1 7.3 5.11 599.2 7.4 4.95 539.9 5.4 4.02
-------------------------------- -------------------------------- ----------------------------------
89,663.6 1,774.3 7.87 88,200.6 1,681.7 7.67 85,857.5 1,620.3 7.59
(868.9) (873.8) (874.7)
3,083.6 3,322.7 3,395.3
1,628.1 1,627.5 1,627.8
3,520.7 3,204.3 3,058.3
2,365.1 2,016.0 2,349.2
-------------------------------- -------------------------------- ----------------------------------
$ 99,392.2 $ 97,497.3 $ 95,413.4
================================ ================================ ==================================
$ 19,904.4 $ 163.2 3.26% $ 20,194.3 $ 155.7 3.10% $ 20,397.8 $ 146.1 2.88%
6,324.0 58.8 3.70 6,449.1 55.1 3.43 6,659.4 53.8 3.25
10,151.8 141.0 5.53 10,023.1 129.4 5.19 9,599.9 116.6 4.89
4,221.4 62.0 5.84 4,024.7 58.1 5.80 3,756.0 49.4 5.29
3,815.3 65.0 6.77 2,760.9 43.9 6.40 2,585.0 38.4 5.97
9,701.5 161.5 6.62 10,162.9 148.0 5.86 9,605.0 150.7 6.31
-------------------------------- -------------------------------- ----------------------------------
54,118.4 651.5 4.79 53,615.0 590.2 4.43 52,603.1 555.0 4.24
11,050.9 176.3 6.35 10,268.0 154.6 6.05 10,465.1 142.8 5.49
1,365.8 22.1 6.44 1,546.9 25.7 6.67 1,402.2 18.9 5.43
8,378.4 142.9 6.78 8,070.9 132.5 6.60 6,952.9 111.5 6.45
-------------------------------- -------------------------------- ----------------------------------
74,913.5 992.8 5.27 73,500.8 903.0 4.94 71,423.3 828.2 4.66
13,039.7 13,251.5 12,947.2
3,951.6 3,549.0 3,566.7
6,012.8 5,948.9 6,023.3
1,474.6 1,247.1 1,452.9
-------------------------------- -------------------------------- ----------------------------------
$ 99,392.2 $ 97,497.3 $ 95,413.4
================================ ================================ ==================================
2.60% 2.73% 2.93%
-------------------------------- -------------------------------- ----------------------------------
$ 781.5 $ 778.7 $ 792.1
-------------------------------- -------------------------------- ----------------------------------
3.47% 3.55% 3.71%
-------------------------------- -------------------------------- ----------------------------------
(3) Derivative instruments used to help balance SunTrust's interest-sensitivity
position increased net interest income $0.1 million, decreased net interest
income $0.7 million, increased net interest income $0.8 million, and
decreased net interest income $0.7 million in the quarters ended December
31, September 30, June 30 and March 31, 2000, respectively. Without these
swaps, the net interest margin would have been 3.49%, 3.47%, 3.55%, and
3.71% in the quarters ended December 31, September 30, June 30 and March
31, 2000, respectively.
18
Interest Rate Risk. The normal course of business activity exposes SunTrust to
interest rate risk. Fluctuations in interest rates may result in changes in the
fair market value of the Company's financial instruments, cash flows and net
interest income. SunTrust's asset/liability management process manages the
Company's interest rate risk position. The objective of this process is the
optimization of the Company's financial position, liquidity and net interest
income, while limiting the volatility to net interest income from changes in
interest rates.
SunTrust uses a simulation modeling process to measure interest rate risk and
evaluate potential strategies. These simulations incorporate assumptions
regarding balance sheet growth and mix, pricing, and the repricing and maturity
characteristics of the existing and projected balance sheet. Other
interest-rate-related risks such as prepayment, basis and option risk are also
considered. Simulation results quantify interest rate risk under various
interest rate scenarios. Senior management regularly reviews the overall
interest rate risk position and develops and implements strategies to manage the
risk.
Management estimates the Company's net interest income for the next twelve
months would decline 1.0% under a gradual increase in interest rates of 100
basis points, versus the projection under stable rates. Net interest income
would increase by 1.4% under a gradual decrease in interest rates of 100 basis
points, versus the projection under stable rates.
The projections of interest rate risk do not necessarily include certain actions
that management may undertake to manage this risk in response to anticipated
changes in interest rates.
Net Interest Income/Margin. SunTrust's net interest margin was 3.57% for the
first three months of 2001, a decrease of 14 basis points from the first three
months of 2000. The decrease is primarily attributable to continued reliance on
purchased liabilities to fund loan growth and additional interest expense to
fund purchases under the SunTrust stock repurchase program. Compared to the
first three months of 2000, the rate on earning assets increased 10 basis points
to 7.69% in the first three months of 2001 and the rate on interest bearing
liabilities increased 25 basis points to 4.91%.
As part of its on-going balance sheet management, the Company continues to take
steps to obtain alternative lower cost funding sources such as developing
initiatives to grow retail deposits to maximize net interest income throughout
2001. During the first quarter of 2001, the Company initiated a campaign to
attract money market accounts. Average money market accounts have grown from
$20.0 billion for the fourth quarter of 2000 to $21.2 billion for the first
quarter of 2001.
Interest income that SunTrust was unable to recognize on nonperforming loans had
a negative impact of three and one basis points on the net interest margin in
the first three months of 2001 and 2000, respectively.
Noninterest Income. Noninterest income in the first quarter of 2001 increased
$89.1 million, or 20.4% from the comparable period last year. The increase
primarily relates to the gain of $52.9 million on the sale of Star Systems Inc.
representing a historical ownership in the ATM network. Mortgage production
related income increased $13.0 million, or 69.8%, due to the high volume of
refinancing activity in the first quarter of 2001 as a result of the lower
interest rate environment. Service charges on deposits and other charges and
fees increased a combined $15.2 million, or 9.5% over the first quarter of 2000.
Increased usage of products and services along with changes in pricing strategy
resulted in the increase in these line items. Included in credit card and other
fees is debit card interchange income of $13.5 million in the first three months
of 2001 compared to $10.8 million in the same period of 2000.
Trust income, SunTrust's largest source of noninterest income, decreased $4.3
million, or 3.3% in the first quarter of 2001 compared to the first quarter of
2000. The decline in trust income was due to the sale of SunTrust
19
Equitable Trust, a subsidiary of SunTrust Equitable Securities, a reduction in
non-recurring revenue and a decline in the market value of trust assets under
management. Compared to the fourth quarter of 2000, trust income increased $2.9
million in the first quarter of 2001 due to an increase in non-recurring
revenue, which traditionally occurs during the first quarter. This increase in
non-recurring revenue was partially offset by the decrease in the market value
of assets under management. The overall market decline resulted in a reduction
in the market value of discretionary trust assets under management of
approximately 6% from the first quarter of 2000. The decline in market value of
trust assets was significantly less than the overall market decline due to
SunTrust's disciplined and diversified investment management approach. During
the first quarter, additional net new business was attracted in all trust
business lines as a result of SunTrust's long-term investment perspective and
client focus.
Trading account profits and commissions increased $17.7 million, or 147.2%, over
the first quarter of 2000 while investment banking income decreased $5.6
million, or 28.4%, over the same period. The changes in these line items are
indicative of the volatility seen in the equity market, as well as the changing
interest rate environment during the first quarter of 2001. Additionally, as a
result of adopting SFAS 133, the Company recorded a pre-tax gain of $2.9 million
to trading account profits and commissions.
Other income included net gains on the sale of mortgage and student loans of
$2.4, $0.8 and $9.8 million in the first quarter of 2001 and fourth and first
quarters of 2000, respectively.
Noninterest Income Table 3
(In millions)
Quarters
----------------------------------------------------------------
2001 2000
-------- --------------------------------------------------
1 4 3 2 1
-------- -------- -------- -------- --------
Trust income $ 124.3 $ 121.4 $ 120.2 $ 123.7 $ 128.6
Service charges on deposit accounts 120.0 118.9 116.9 112.6 111.3
Other charges and fees 55.6 55.1 56.3 50.4 49.1
Mortgage production related income 31.7 27.1 23.8 20.5 18.7
Mortgage servicing related income 6.7 9.5 7.9 7.7 7.7
Trading account profits and commissions 29.7 16.3 4.9 (1.4) 12.0
Investment Banking Income 14.1 20.3 36.0 35.3 19.7
Credit card and other fees 25.6 24.9 24.2 24.4 22.1
Retail investment services 24.8 22.8 24.0 30.5 30.8
Other income 36.3 30.5 33.6 38.8 30.0
Securities gains (losses) 57.1 (1.2) (0.6) 1.5 6.9
-------- -------- -------- -------- --------
Total noninterest income $ 525.9 $ 445.6 $ 447.2 $ 444.0 $ 436.9
======== ======== ======== ======== ========
20
Noninterest Expense. Noninterest expense increased $38.4 million, or 5.4% in the
first quarter of 2001 compared to the same period last year. Personnel expenses,
consisting of salaries, other compensation and employee benefits, increased $5.0
million, or 1.2% from the earlier period.
The $55.6 million increase in other expenses during the first quarter of 2001 is
due in part to servicing income of approximately $9.5 million from MBNA America
Bank, N.A. on the sold credit card portfolio recorded as a reduction to other
expenses in the first quarter of 2000. The Company also incurred $7.0 million in
expenses on its One Bank initiative for enhancements to customer based systems
across its geographic footprint that is expected to yield operating efficiencies
in the future. Additional expenses were incurred in the first quarter of 2001
for the Company's branding campaigns.
In the first quarter of 2000, merger-related expenses were primarily related to
accelerated depreciation and miscellaneous integration costs. There were no
additional merger-related expenses in the first quarter of 2001. The efficiency
ratio improved from 57.3% in the first quarter of 2000 to 55.4% in the first
quarter of 2001 due to the Company's continued focus on efficiency and cost
control projects.
Noninterest Expense Table 4
(In millions)
Quarters
------------------------------------------------------------
2001 2000
-------- -----------------------------------------------
1 4 3 2 1
-------- ------- ------- ------- -------
Salaries $ 286.0 $ 282.0 $ 278.5 $ 292.1 $ 287.3
Other compensation 90.3 89.3 82.9 73.1 83.8
Employee benefits 56.7 37.2 39.5 41.4 56.9
Net occupancy expense 50.0 50.7 51.9 49.9 50.1
Outside processing and software 45.1 43.9 42.4 44.4 41.6
Equipment expense 44.5 44.2 47.2 50.7 51.6
Marketing and customer development 23.0 30.7 25.3 27.9 22.3
Postage and delivery 16.2 14.9 15.4 16.3 16.7
Credit and collection services 13.6 12.4 14.2 16.0 14.3
Communications 13.3 14.2 15.0 15.4 15.2
Operating supplies 11.3 11.2 11.3 12.6 12.2
Consulting and legal 9.7 13.2 16.4 18.2 11.8
Amortization of intangible assets 8.3 8.8 8.9 8.8 9.0
FDIC premiums 3.9 2.8 2.8 2.8 2.8
Merger-related expenses - 2.4 8.3 18.2 13.6
Other real estate income (0.7) (2.3) (0.4) (0.3) (0.8)
Other expense 71.5 42.3 47.0 32.3 15.9
-------- ------- ------- ------- -------
Total noninterest expense $ 742.7 $ 697.9 $ 706.6 $ 719.8 $ 704.3
======== ======= ======= ======= =======
Efficiency ratio 55.4% 56.2% 57.5% 58.9% 57.3%
21
Provision for Loan Losses. The SunTrust Allowance for Loan Losses Committee
meets at least quarterly to affirm the allowance methodology, analyze provision
and charge-off trends and assess the adequacy of the allowance. The allowance
analysis is based on specifically analyzed loans, historical loss rates and
other internal and external factors that affect credit risk. These other factors
consider variables such as the interest rate environment, corporate and consumer
debt levels, volatility in the financial markets, and known events that affect
the economies of the Company's primary market area. These factors are key
elements in the assessment of the adequacy of the allowance because of their
impact on borrowers' repayment capacity.
First quarter net charge-offs for 2001 were $46.7 million higher than in the
same period last year, mainly due to the strategic decision to sell three of the
Company's largest nonperforming loans and to write-down other large corporate
nonperforming loans that had credit deterioration. The loan sales, which
resulted in losses of $11.7 million, included the Company's largest
nonperforming healthcare credit, together with two nonperforming loans in the
movie theater industry that eliminated SunTrust's unsecured exposure to that
sector. Nonperforming loans declined 14.0% from December 31, 2000 due primarily
to the aforementioned sales and write-downs, but increased 22.4% from March 31,
2000. The year to year increase was due to the broadened impact of the slowing
economy.
Provision for loan losses totaled $67.3 million in the first three months of
2001, compared to $22.3 million in the same period last year. This increase was
primarily related to loan sales and large corporate write-downs during the
quarter. The ratio of net charge-offs to average loans increased to .38% in the
first three months of 2001 from .12% in the same period last year. First quarter
loan losses were unusually high due to unique market opportunities to sell
certain problem assets. While management does not believe that this increased
level of charge-offs will continue throughout the remainder of the year, some
increases over 2000 net charge-offs and provision expenses are expected due to
the slowing economy.
At March 31, 2001, SunTrust's allowance for loan losses totaled $872.0 million
which was 1.24% of period-end loans and 250.1% of total nonperforming loans. As
of March 31, 2000, the allowance totaled $874.0 million, or 1.27% of period-end
loans and 306.8% of total nonperforming loans. Both ratios declined from the
corresponding quarter one year earlier, but improved from December 31, 2000. The
allowance level was also impacted by the Company's transfer of $3.6 million in
reserves from the allowance for loan losses to other liabilities for the
potential recourse liability related to the loan securitizations in the first
quarter of 2001.
22
Summary of Loan Loss Experience Table 5
(Dollars in millions)
Quarters
--------------------------------------------------------------------------
2001 2000
---------- ----------------------------------------------------------
1 4 3 2 1
---------- ---------- ---------- ---------- ----------
Allowance for Loan Losses
Balance - beginning of quarter $ 874.5 $ 874.5 $ 874.5 $ 874.0 $ 871.3
Allowance from acquisitions and
other activity - net (3.5) (0.1) - - -
Provision for loan losses 67.3 53.5 30.5 27.7 22.3
Charge-offs:
Commercial (56.8) (47.0) (28.7) (23.5) (16.3)
Real estate:
Construction (0.6) - - (0.1) -
Residential mortgages (2.3) (1.8) (1.6) (2.2) (2.2)
Other (1.0) (1.0) (1.2) (0.9) (0.3)
Credit card (0.5) (1.6) (1.7) (0.9) (1.2)
Other consumer loans (18.2) (15.7) (13.9) (12.6) (15.3)
---------- ---------- ---------- ---------- ----------
Total charge-offs (79.4) (67.1) (47.1) (40.2) (35.3)
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 4.6 4.9 8.5 4.6 4.6
Real estate:
Construction 0.2 - 0.3 - 0.1
Residential mortgages 0.5 1.1 0.9 0.7 0.6
Other 1.4 1.3 0.6 0.2 1.8
Credit card 0.4 0.5 0.5 0.6 1.5
Other consumer loans 6.0 5.9 5.8 6.9 7.1
---------- ---------- ---------- ---------- ----------
Total recoveries 13.1 13.7 16.6 13.0 15.7
---------- ---------- ---------- ---------- ----------
Net charge-offs (66.3) (53.4) (30.5) (27.2) (19.6)
---------- ---------- ---------- ---------- ----------
Balance - end of quarter $ 872.0 $ 874.5 $ 874.5 $ 874.5 $ 874.0
========== ========== ========== ========== ==========
Quarter-end loans outstanding $ 70,360.1 $ 72,239.8 $ 72,113.6 $ 71,450.4 $ 68,614.4
Average loans 71,654.4 71,774.6 71,506.9 69,830.6 67,030.0
Allowance to quarter-end loans 1.24% 1.21% 1.21% 1.22% 1.27%
Allowance to nonperforming loans 250.1 215.8 229.6 309.6 306.8
Net charge-offs to average loans
(annualized) 0.38 0.30 0.17 0.16 0.12
Provision to average loans (annualized) 0.38 0.30 0.17 0.16 0.13
Recoveries to total charge-offs 16.5 20.4 35.2 32.3 44.5
23
Nonperforming Assets Table 6
(Dollars in millions)
2001 2000
---------- -----------------------------------------------------
March 31 December 31 September 30 June 30 March 31
---------- ----------- ------------ --------- ----------
Nonperforming Assets
Nonaccrual loans:
Commercial $ 210.5 $ 273.6 $ 270.4 $ 149.1 $ 129.6
Real Estate:
Construction 2.1 2.2 2.5 1.8 4.7
Residential mortgages 83.3 81.8 65.1 75.6 84.0
Other 32.8 29.0 23.9 27.4 37.8
Consumer loans 20.0 18.7 19.0 28.6 28.8
---------- ----------- ------------ --------- ----------
Total nonaccrual loans 348.7 405.3 380.9 282.5 284.9
Restructured loans - - - - -
---------- ----------- ------------ --------- ----------
Total nonperforming loans 348.7 405.3 380.9 282.5 284.9
Other real estate owned 20.6 23.0 23.6 23.2 27.0
---------- ----------- ------------ --------- ----------
Total nonperforming assets $ 369.3 $ 428.3 $ 404.5 $ 305.7 $ 311.9
========== =========== ============ ========= ==========
Ratios:
Nonperforming loans to total loans 0.50% 0.56% 0.53% 0.40% 0.42%
Nonperforming assets to total loans
plus other real estate owned 0.52 0.59 0.56 0.43 0.45
Accruing Loans Past Due
90 Days or More $ 223.7 $ 181.2 $ 150.8 $ 189.4 $ 160.1
Nonperforming Assets. Nonperforming assets consist of nonaccrual loans,
restructured loans and other real estate owned. Nonperforming assets declined
13.8%, or $59.0 million since December 31, 2000, but increased 18.4%, or $57.4
million since March 31, 2000. The decline from December 31, 2000 was due
primarily to the sale of three of the Company's largest nonperforming loans and
the write-down of certain other large corporate credits. Much of the increase
since March 31, 2000 can be attributed to the continued economic slowdown that
occurred in a diverse mix of industries, including manufacturing, technology,
agribusiness and transportation, along with companies impacted by asbestos
litigation. Given the continued weakness in the economy, Management anticipates
modest increases in nonperforming assets during the remainder of the year.
Interest income on nonaccrual loans, if recognized, is recorded using the cash
basis method of accounting. During the first three months of 2001, this amounted
to $5.3 million. Interest income of $7.1 million would have been recorded if all
nonaccrual and restructured loans had been accruing interest according to their
original contract terms.
24
Loan Portfolio by Types of Loans Table 7
(In millions)
2001 2000
---------- -------------------------------------------------------
March 31 December 31 September 30 June 30 March 31
---------- ----------- ------------ ---------- ----------
Commercial $ 30,583.3 $ 30,781.1 $ 30,821.6 $ 30,209.5 $ 29,639.6
Real estate:
Construction 3,631.0 2,966.1 2,884.3 2,647.2 2,600.8
Residential mortgages 17,706.6 19,953.0 20,557.4 20,295.0 19,643.1
Other 7,693.9 8,121.4 7,960.6 7,851.5 7,937.4
Credit card 82.6 76.8 79.3 75.4 98.7
Other consumer loans 10,662.7 10,341.4 9,810.4 10,371.8 8,694.8
---------- ----------- ----------- ---------- ----------
Total loans $ 70,360.1 $ 72,239.8 $ 72,113.6 $ 71,450.4 $ 68,614.4
========== =========== =========== ========== ==========
Loans. Total loans at March 31, 2001 were $70.4 billion, an increase of $1.7
billion or 2.5% from March 31, 2000. The Company recorded steady growth in
commercial loans, up 3.2% from March 31, 2000, while recognizing significant
loan growth in its real estate construction portfolio, up 39.6%. Residential
real estate declined 9.9% from $19.6 billion in the first quarter of 2000 due to
the Company's securitizations of $2.8 billion in residential mortgages in the
fourth quarter 2000 and first quarter 2001 that are now carried as "Securities
available for sale" on the balance sheet. Of the $17.7 billion in residential
mortgages at March 31, 2001, $2.2 billion were home equity loans, which also
demonstrated significant growth of 13.4% in the last twelve months.
Income Taxes. The provision for income taxes was $183.3 million for the first
three months of 2001 compared to $173.4 million in the same period last year.
This represents a 35% effective tax rate for both quarters.
Securities available for sale. The investment portfolio is managed to optimize
yield over an entire interest rate cycle while providing liquidity and managing
market risk. The portfolio yield increased from an average of 6.65% in the first
quarter of 2000 to 6.92% in the first quarter of 2001 primarily because the
Company was able to replace lower-yielding securities with longer-term,
higher-yielding securities at historically attractive rates.
The average portfolio size increased by $1.2 billion from December 31, 2000 to
March 31, 2001, on an amortized cost basis. The increase during the first
quarter of 2001 was due to the Company securitizing $1.9 billion of
single-family mortgage loans to mortgage-backed securities for funding
flexibility and more favorable regulatory capital treatment. The Company
securitized $0.9 billion of single-family mortgage loans in the fourth quarter
2000. These securities were retained in the investment portfolio and the Company
may continue to securitize single-family mortgage loans throughout 2001.
At March 31, 2001, approximately 1% of the portfolio consisted of U.S. Treasury
securities, 13% U.S. government agency securities, 54% mortgage-backed
securities, 12% asset-backed securities, 13% corporate bonds, 3% municipal
securities and 4% other securities. Most of SunTrust's holdings in
mortgage-backed securities are backed by U.S. government or federal agency
guarantees thus limiting the credit risk associated with the mortgage loans. The
carrying value of the securities portfolio, all of which is classified as
"Securities available for sale" reflected $2.5 billion in net unrealized gains
at March 31, 2001, including a $2.2 billion unrealized gain on SunTrust's
investment in common stock of The Coca-Cola Company. The market value of this
common stock investment decreased $761.6 million during the first quarter of
2001, which did not affect the net income of SunTrust, but was included in
comprehensive income.
25
Liquidity Management. Liquidity is managed to ensure there is sufficient funding
to satisfy demand for credit, deposit withdrawals and attractive investment
opportunities. A large, stable core deposit base, strong capital position and
excellent credit ratings are the solid foundation for the Company's liquidity
position.
Funding sources primarily include customer-based core deposits, but also include
borrowed funds and cash flows from operations. Customer-based core deposits, the
Company's largest and most cost-effective source of funding, accounted for 60%
of the funding base on average for the first quarter of 2001 compared to 62% at
December 31, 2000 and 63% in the first quarter of 2000. Net borrowed funds,
which primarily include short-term funds purchased and sold, wholesale domestic
and foreign deposits, other short term borrowings and long term debt, were $34.3
billion at March 31, 2001, compared with $33.2 billion at December 31, 2000 and
$30.0 billion at March 31, 2000. Cash flows from operations are also a
significant source of liquidity. Net cash from operations primarily results from
net income adjusted for noncash items such as depreciation and amortization,
provision for loan losses, and deferred tax items.
Liquidity is strengthened by ready access to a diversified base of wholesale
funding sources. These sources include fed funds purchased, securities sold
under agreements to repurchase, negotiable certificates of deposit, offshore
deposits, Federal Home Loan Bank advances, Global Bank Note issuance, and
commercial paper issuance by the Parent Company. Liquidity is also available
through unpledged securities in the investment portfolio and the securitization
of loans.
In November 2000, the Company established a $10 billion Senior and Subordinated
Global Bank Note program to expand funding and capital sources to include both
domestic and international investors. In the first quarter of 2001, $500 million
of subordinated debt was issued under this program with an original maturity of
April 2011.
In the first quarter of 2001, the Company securitized $1.9 billion of
single-family mortgage loans. In addition, during the first quarter of 2001 the
Company increased its long-term advances with the Federal Home Loan Bank in
order to reduce its reliance on purchased funds.
The Company has a contingency funding plan that stress tests liquidity needs
that may arise from certain events such as rapid loan growth or significant
deposit runoff. The plan also provides for continual monitoring of net borrowed
funds dependence and available sources of liquidity. Management believes the
Company has the funding capacity to meet the liquidity needs arising from
potential events.
26
Derivatives. Derivative financial instruments, such as interest rate swaps,
options, caps, floors, futures and forward contracts, are components of the
Company's risk management profile. The Company also enters into derivative
instruments as a service to banking customers. Where contracts have been created
for customers, the Company generally enters into offsetting positions to
eliminate the Company's exposure to market risk.
The Company monitors its sensitivity to changes in interest rates and may use
derivative instruments to hedge this risk. Prior to the adoption of SFAS 133,
certain interest rate swaps were classified as hedges and recorded in the margin
using the accrual method of accounting. The related market value of the
derivative was accounted for off-balance sheet. These interest rate swap
accruals reduced net interest income by $0.7 million in the first quarter of
2000. On January 1, 2001, the Company adopted SFAS 133. Accordingly, all
derivatives are recorded in the financial statements at fair value. Additional
information on derivative hedging activity is included in Note 3.
Certain derivatives are classified as trading assets and liabilities. Additional
trading income of $2.9 million was recorded in the first quarter of 2001 to
adjust the value of these interest rate swaps to their current market value.
The following table shows the derivative instruments entered into by the Company
as an end-user.
Derivative Instruments Table 8
(Dollars in thousands)
As of March 31, 2001
------------------------------------------------------------------------------------------
Estimated Fair Value
-----------------------------------
Weighted
Average Average
Notional Maturity Received Average Unrealized Unrealized
Balance In Months Rate Pay Rate Gains Loses Net
----------------------------------------------------------------------------------------
Mortgage Lending Commitments
Forward Contracts $ 3,837,349 2 -% -% $ 1,557 $ (18,899) $ (17,342)
Interest Rate Lock Commitments 1,703,189 2 - - 199 (1,916) (1,717)
Option Contracts 40,000 2 5.00 (1) - 44 - 44
----------- -----------------------------------
Total Mortgage Related Derivatives 5,580,538 1,800 (20,815) (19,015)
Foreign Currency
Forward Contracts 752,017 8 - - 18,068 (19,675) (1,607)
Interest Rate Swaps 2,595,878 33 5.71 6.22 42,035 (42,064) (29)
Interest Rate Caps/Floors 750,000 18 5.11 (1) - 3,445 - 3,445
Futures Contracts 678,000 11 - - - (1,947) (1,947)
Equity Collar 56,081 24 (2) - - - - -
----------- ---------
Total Derivatives $10,412,514 $ (19,153)
=========== =========
(1) Average option strike price.
(2) Option expiration.
27
Capital Ratios Table 9
(Dollars in millions)
2001 2000
---------- --------------------------------------------------------
March 31 December 31 September 30 June 30 March 31
---------- ----------- ------------ ----------- ----------
Tier 1 capital $ 6,760.5 $ 6,850.6 $ 6,677.4 $ 6,648.7 $ 6,484.3
Total capital 10,507.1 10,488.9 10,216.1 10,342.7 9,754.8
Risk-weighted assets 98,690.0 96,656.7 95,183.9 95,571.5 88,973.4
Risk-based ratios:
Tier 1 capital 6.85% 7.09% 7.02% 6.95% 7.28%
Total capital 10.65 10.85 10.73 10.82 10.96
Tier 1 leverage ratio 6.77 6.98 6.92 7.00 7.00
Total shareholders' equity to assets 7.55 7.96 7.66 7.60 7.40
Capital Resources. Regulatory agencies measure capital adequacy within a
framework that makes capital requirements sensitive to the risk profiles of
individual banking companies. The guidelines define capital as either Tier 1
(primarily common shareholders' equity, as defined to include certain debt
obligations) or Tier 2 (to include certain other debt obligations and a portion
of the allowance for loan losses and since 1998, 45% of the unrealized gains on
equity securities). The Company is subject to a minimum Tier 1 capital ratio
(Tier 1 capital to risk-weighted assets) of 4%, total capital ratio (Tier 1 plus
Tier 2 to risk-weighted assets) of 8% and Tier 1 leverage ratio (Tier 1 to
average quarterly assets) of 3%. To be considered a "well capitalized"
institution, the Tier 1 capital ratio, the total capital ratio, and the Tier 1
leverage ratio must equal or exceed 6%, 10% and 5%, respectively. SunTrust is
committed to remaining well capitalized.
The Company raised $100 million of regulatory capital during 2000 through the
sale of preferred shares issued by a real estate investment trust subsidiary. In
the first quarter of 2001, the Company raised an additional $500 million of
regulatory capital through the issuance of subordinated debt under the Global
Bank Note program.
On August 10, 1999, the Board of Directors authorized the purchase of up to 15
million shares of SunTrust common stock. In 2000, SunTrust purchased 1.2 million
shares of SunTrust common stock to complete the August 10, 1999 authorization.
On February 8, 2000, the Board of Directors authorized the purchase of up to 12
million shares of SunTrust common stock. As of December 31, 2000, 10.1 million
shares had been purchased under this authorization. On August 8, 2000, the Board
of Directors authorized the purchase of up to 10 million shares of SunTrust
common stock (including 1.9 million shares still remaining unpurchased under the
authorization to purchase shares of February 8, 2000). As of March 31, 2001, the
Company had 3.7 million shares remaining to be purchased under the August 8,
2000 authorization.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that there have not been any material changes in
quantitative and qualitative information about market risk since year-end 2000.
In particular, the loan securitizations during the three months ended March 31,
2001 did not have a material impact on the Company's interest rate risk profile.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Registrant was held on April
17, 2001. At the meeting, the following individuals were elected
directors of the Registrant: Patricia C. Frist, Douglas N. Daft,
Summerfield K. Johnston, Jr., Larry L. Prince, R. Randall Rollins,
Frank S. Royal, M.D. and James B. Williams. Votes ranged from
244,080,343 to 248,358,158. J. Hyatt Brown, Alston D. Correll, A.W.
Dahlberg, David H. Hughes, M. Douglas Ivester, Joseph L. Lanier, Jr.,
G. Gilmer Minor, III and L. Phillip Humann continue as directors of
the registrant.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 10.1-10.10 Change in Control Agreements
B. Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 15th day of May, 2001.
SunTrust Banks, Inc.
-------------------
(Registrant)
/s/ W. P. O'Halloran
----------------------
W. P. O'Halloran
Senior Vice President and Controller
(Chief Accounting Officer)
29