10-Q 1 0001.txt JUNE 30, 2000 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 June 30, 2000 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 July 31, 2000, 298,102,334 shares of the Registrant's Common Stock, $1.00 par value were outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 Notes to Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-25 PART II OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 26
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 six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the full year 2000. 2 Consolidated Statements of Income
Three Months Six Months Ended June 30 Ended June 30 -------------------------------- -------------------------------- (Dollars in thousands except per share data)(Unaudited) 2000 1999 2000 1999 -------------- --------------- -------------- --------------- Interest Income Interest and fees on loans $ 1,367,374 $ 1,153,809 $2,673,903 $2,296,782 Interest and fees on loans held for sale 23,703 47,350 48,829 105,930 Interest and dividends on securities available for sale Taxable interest 224,910 208,012 455,532 405,596 Tax-exempt interest 6,492 7,871 13,327 15,807 Dividends (1) 17,749 15,906 34,772 31,542 Interest on funds sold 24,505 16,528 43,843 32,003 Interest on deposits in other banks 232 184 567 1,892 Other interest 7,084 2,876 12,105 4,954 -------------- --------------- -------------- --------------- Total interest income 1,672,049 1,452,536 3,282,878 2,894,506 -------------- --------------- -------------- --------------- Interest Expense Interest on deposits 590,255 391,627 1,145,217 785,766 Interest on funds purchased 154,561 172,391 297,394 341,688 Interest on other short-term borrowings 25,673 16,797 44,619 37,085 Interest on long-term debt 132,530 86,919 244,025 175,347 -------------- --------------- -------------- --------------- Total interest expense 903,019 667,734 1,731,255 1,339,886 -------------- --------------- -------------- --------------- Net Interest Income 769,030 784,802 1,551,623 1,554,620 Provision for loan losses 27,693 48,822 49,985 90,817 -------------- --------------- -------------- --------------- Net interest income after provision for loan losses 741,337 735,980 1,501,638 1,463,803 -------------- --------------- -------------- --------------- Noninterest Income Trust income 125,350 126,285 255,639 252,605 Service charges on deposit accounts 112,589 107,067 223,855 213,181 Other charges and fees 48,773 49,368 96,221 95,910 Retail investment services 30,550 26,001 61,348 49,516 Credit card and other fees 24,378 28,222 46,469 51,349 Mortgage production related income 20,474 47,650 39,167 101,165 Mortgage servicing related income 7,692 5,178 15,414 8,134 Corporate and institutional investment services 35,321 16,310 54,992 34,990 Trading account profits and commissions (1,442) 11,437 10,571 22,026 Other noninterest income 38,754 31,546 68,753 48,649 Securities gains (losses) 1,531 3,879 8,393 3,147 -------------- --------------- -------------- --------------- Total noninterest income 443,970 452,943 880,822 880,672 -------------- --------------- -------------- --------------- Noninterest Expense Salaries and other compensation 365,251 389,261 736,336 772,196 Employee benefits 41,411 41,535 98,335 95,918 Equipment expense 50,667 49,799 102,305 95,088 Net occupancy expense 49,890 49,937 99,950 97,606 Outside processing and software 44,388 38,749 85,999 73,523 Marketing and customer development 27,855 23,875 50,157 45,665 Merger-related expenses 18,183 17,547 31,816 31,391 Amortization of intangible assets 8,777 8,965 17,771 17,902 Other noninterest expense 113,362 116,247 201,430 230,326 -------------- --------------- -------------- --------------- Total noninterest expense 719,784 735,915 1,424,099 1,459,615 -------------- --------------- -------------- --------------- Income before provision for income taxes 465,523 453,008 958,361 884,860 Provision for income taxes 148,054 159,345 321,453 309,460 -------------- --------------- -------------- --------------- Net Income $ 317,469 $ 293,663 $ 636,908 $ 575,400 ============== =============== ============== =============== Average common shares - diluted 302,140,506 322,448,490 304,439,570 322,406,414 Average common shares - basic 298,985,834 318,315,379 301,223,533 318,203,347 Net income per average common share - diluted $ 1.05 $ 0.91 $ 2.09 $ 1.78 Net income per average common share - basic 1.06 0.92 2.11 1.81 Dividends declared per common share 0.370 0.345 0.740 0.690 (1) Includes dividends on common stock of The Coca-Cola Company 8,206 7,722 16,411 15,445 See notes to consolidated financial statements
3 Consolidated Balance Sheets
June 30 December 31 June 30 (Dollars in thousands) (Unaudited) 2000 1999 1999 ---------------- --------------- ---------------- Assets Cash and due from banks $ 2,847,699 $ 3,909,687 $ 3,786,251 Trading account 668,709 259,547 240,648 Securities available for sale (1) 17,382,207 18,317,297 18,384,169 Funds sold 1,621,189 1,609,679 1,417,290 Loans held for sale 1,345,694 1,531,787 2,408,689 Loans 71,450,408 66,002,831 62,922,406 Allowance for loan losses (874,484) (871,323) (941,444) ---------------- --------------- ---------------- Net loans 70,575,924 65,131,508 61,980,962 Premises and equipment 1,631,331 1,636,484 1,618,936 Intangible assets 800,728 804,632 819,020 Customers' acceptance liability 173,964 192,045 350,865 Other assets 2,703,365 1,997,302 2,213,051 ---------------- --------------- ---------------- Total assets $99,750,810 $95,389,968 $93,219,881 ================ =============== ================ Liabilities and Shareholders' Equity Noninterest-bearing deposits $13,719,684 $14,200,522 $13,441,890 Interest-bearing deposits 54,956,751 45,900,007 46,918,195 ---------------- --------------- ---------------- Total deposits 68,676,435 60,100,529 60,360,085 Funds purchased 10,159,988 15,911,917 13,558,897 Other short-term borrowings 1,419,499 2,259,010 1,761,156 Long-term debt 7,200,459 4,967,346 4,519,796 Guaranteed preferred beneficial interests in debentures 1,050,000 1,050,000 1,050,000 Acceptances outstanding 173,964 192,045 350,865 Other liabilities 3,491,511 3,282,259 3,426,415 ---------------- --------------- ---------------- Total liabilities 92,171,856 87,763,106 85,027,214 ---------------- --------------- ---------------- Preferred stock, no par value; 50,000,000 shares authorized; none issued - - - Common stock, $1.00 par value 323,163 323,163 323,012 Additional paid in capital 1,272,178 1,293,387 1,303,609 Retained earnings 5,873,963 5,461,351 4,930,193 Treasury stock and other (1,357,018) (1,013,861) (93,762) ---------------- --------------- ---------------- Realized shareholders' equity 6,112,286 6,064,040 6,463,052 Accumulated other comprehensive income 1,466,668 1,562,822 1,729,615 ---------------- --------------- ---------------- Total shareholders' equity 7,578,954 7,626,862 8,192,667 ---------------- --------------- ---------------- Total liabilities and shareholders' equity $99,750,810 $95,389,968 $93,219,881 ================ =============== ================ Common shares outstanding 301,931,828 308,353,207 321,632,977 Common shares authorized 750,000,000 500,000,000 500,000,000 Treasury shares of common stock 21,230,929 14,809,550 1,379,469 (1) Includes net unrealized gains on securities available for sale $ 2,371,237 $ 2,527,705 $ 2,805,074 See notes to consolidated financial statements
4 Consolidated Statements of Cash Flows
Six Months Ended June 30 --------------------------------------- (Dollars in thousands) (Unaudited) 2000 1999 ------------------- ---------------- Cash flows from operating activities: Net income $ 636,908 $ 575,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 149,776 138,982 Provisions for loan losses and foreclosed property 50,192 92,972 Amortization of compensation element of restricted stock 4,726 6,741 Securities gains (8,393) (3,147) Net gain on sale of non-interest earning assets (7,888) (14,106) Net decrease in loans held for sale 186,093 1,137,918 Net increase in accrued interest receivable, prepaid expenses and other assets (1,213,778) (194,446) Net increase in accrued interest payable, accrued expenses and other liabilities 269,566 53,393 --------------- ---------------- Net cash provided by operating activities 67,202 1,793,707 --------------- ---------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 1,239,752 2,286,636 Proceeds from sales of securities available for sale 667,038 1,839,713 Purchases of securities available for sale (1,128,413) (5,522,642) Net increase in loans (5,491,330) (1,429,064) Capital expenditures (70,479) (166,306) Proceeds from the sale of assets 12,766 23,181 Loan recoveries 28,795 35,045 --------------- ---------------- Net cash used in investing activities (4,741,871) (2,933,437) --------------- ---------------- Cash flows from financing activities: Net increase in deposits 8,575,906 1,326,802 Net decrease in funds purchased and other short-term borrowings (6,591,440) (612,766) Proceeds from the issuance of long-term debt 3,113,839 90,272 Repayment of long-term debt (880,726) (328,345) Proceeds from the exercise of stock options 7,543 - Proceeds from stock issuance 13,202 11,063 Proceeds used in the acquisition of stock (389,837) - Dividends paid (224,296) (220,589) --------------- ---------------- Net cash provided by financing activities 3,624,191 266,437 --------------- ---------------- Net decrease in cash and cash equivalents (1,050,478) (873,293) Cash and cash equivalents at beginning of year 5,519,366 6,076,834 --------------- ---------------- Cash and cash equivalents at end of period $ 4,468,888 $ 5,203,541 =============== ================ Supplemental Disclosure Interest paid $ 1,675,409 $ 1,363,341 Income taxes paid 269,144 239,106
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, 1999 $322,485 $ 1,293,011 $4,575,382 $ (100,441) $2,088,207 $ 8,178,644 Net income - - 575,400 - - 575,400 Other comprehensive income: Change in unrealized gains (losses) on securities, net of taxes - - - - (358,592) (358,592) --------------- Total comprehensive income - - - - - 216,808 Cash dividends declared, $0.690 per share - - (220,589) - - (220,589) Exercise of stock options 470 6,714 - - - 7,184 Amortization of compensation element of restricted stock - - - 6,741 - 6,741 Issuance of stock for employee benefit plans 57 3,884 - (62) - 3,879 ---------------------------------------------------------------------------------------- Balance, June 30, 1999 $323,012 $ 1,303,609 $4,930,193 $ (93,762) $1,729,615 $ 8,192,667 ======================================================================================== Balance, January 1, 2000 $323,163 $ 1,293,387 $5,461,351 $(1,013,861) $1,562,822 $ 7,626,862 Net income - - 636,908 - - 636,908 Other comprehensive income: Change in unrealized gains (losses) on securities, net of taxes - - - - (96,154) (96,154) --------------- Total comprehensive income - - - - - 540,754 Cash dividends declared, $0.740 per share - - (224,296) - - (224,296) Exercise of stock options - (16,529) - 24,072 - 7,543 Acquisition of treasury stock - - - (389,837) - (389,837) Restricted stock activity - (594) - 594 - - Amortization of compensation element of restricted stock - - - 4,726 - 4,726 Issuance of stock for employee benefit plans - (4,086) - 17,288 - 13,202 ---------------------------------------------------------------------------------------- Balance, June 30, 2000 $323,163 $ 1,272,178 $5,873,963 $(1,357,018) $1,466,668 $ 7,578,954 ========================================================================================
* Balance at June 30, 1999 includes $29,493 for treasury stock and $64,269 for compensation element of restricted stock. Balance at June 30, 2000 includes $1,306,813 for treasury stock and $50,205 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, 1999. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. Note 2 - Acquisitions For the first six months of 2000, $31.8 million of merger-related charges were recorded compared to $31.4 million in 1999. These charges included $0.6 million in accelerated depreciation and amortization based upon estimates of systems integration timetables, $0.8 million in severance and $30.4 million in system integration costs. SunTrust expects to record additional merger-related charges of approximately $10.7 million through the remainder of year 2000. Note 3 - Derivative Financial Instruments SunTrust uses derivatives to hedge interest rate exposures by modifying the interest rate characteristics of related balance sheet instruments. The specific criteria required for derivatives used as hedges are described below. Derivatives that do not meet these criteria are carried at market value with changes in value recognized currently in earnings. Derivatives used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. Derivatives used for hedging purposes may include swaps, forwards, futures and options. The interest component associated with derivatives used as hedges or to modify the interest rate characteristics of assets and liabilities is recognized over the life of the contract in net interest income. If a contract is cancelled prior to its termination date, the cumulative change in the market value of such derivatives is recorded as an adjustment to the carrying value of the underlying asset or liability and recognized in net interest income over the expected remaining life of the related asset or liability. In instances where the underlying instrument is sold, the fair value of the associated derivative is recognized immediately in the component of earnings relating to the underlying instrument. 7 Notes to Consolidated Financial Statements (Unaudited) - continued In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. This statement could increase volatility in earnings and other comprehensive income. In June of 1999, SFAS No. 133 was amended by SFAS No. 137, which delays the effective date of implementation until fiscal years beginning after June 15, 2000. SunTrust will adopt SFAS No. 133 effective January 1, 2001. In June of 2000, SFAS No. 133 was amended by SFAS 138, which addresses issues related to implementation difficulties. SunTrust completed an in-depth analysis to determine the effects of the implementation and currently it is not expected to have a material impact on SunTrust's financial position or results of operations. 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. 8 Notes to Consolidated Financial Statements (Unaudited) - continued Note 5 - Comprehensive Income The Company's comprehensive income, which includes certain transactions and other economic events that bypass the income statement, consists of net income and unrealized gains and losses on securities available for sale, net of income taxes. Comprehensive income for the six months ended June 30, 2000 and 1999 is calculated as follows: (In thousands)
Before Net of Income Tax Income Tax Income Tax ---------- ---------- ---------- Unrealized losses, net, recognized in other comprehensive income: Six months ended June 30, 2000 $ (156,468) $ (60,314) $ (96,154) Six months ended June 30, 1999 (574,651) (216,059) (358,592) 2000 1999 Amounts reported in net income: Gain (loss) on sale of securities $ 8,393 $ 3,147 Net (accretion) amortization (4,622) 2,999 -------------- ---------------- Reclassification adjustment 3,771 6,146 Income tax expense (1,454) (2,311) -------------- ---------------- Reclassification adjustment, net of tax $ 2,317 $ 3,835 ============== ================ Amounts reported in other comprehensive income: Unrealized loss arising during period, net of tax $ (93,837) $ (354,757) Reclassification adjustment, net of tax (2,317) (3,835) -------------- ---------------- Net unrealized losses recognized in other comprehensive income (96,154) (358,592) Net income 636,908 575,400 -------------- ---------------- Total comprehensive income $ 540,754 $ 216,808 ============== ================
9 Notes to Consolidated Financial Statements (Unaudited) - continued Note 6 - Earnings Per Share Reconciliation Net income is the same in the calculation of basic and diluted EPS. A reconciliation of the difference between average basic common shares outstanding and average diluted common shares outstanding for the six months ended June 30, 2000 and 1999 is included in the following table. Computation of Per Share Earnings (In thousands, except per share data)
Three Months Six Months Ended June 30 Ended June 30 ------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------ ---------------- ----------------- ----------------- Basic Net income $ 317,469 $ 293,663 $ 636,908 $ 575,400 ------------ ---------------- ----------------- ----------------- Average common shares 298,986 318,315 301,224 318,203 ------------ ---------------- ----------------- ----------------- Earnings per common share - basic $ 1.06 $ 0.92 $ 2.11 $ 1.81 ============ ================ ================= ================= Diluted Net income $ 317,469 $ 293,663 $ 636,908 $ 575,400 ------------ ---------------- ----------------- ----------------- Average common shares outstanding 298,986 318,315 301,224 318,203 Effect of dilutive securities: Stock options 1,351 2,467 1,431 2,554 Performance restricted stock 1,804 1,666 1,785 1,649 ------------ ---------------- ----------------- ----------------- Average diluted common shares 302,141 322,448 304,440 322,406 ------------ ---------------- ----------------- ----------------- Earnings per common share - diluted $ 1.05 $ 0.91 $ 2.09 $ 1.78 ============ ================ ================= ================= 10
Notes to Consolidated Financial Statements (Unaudited) - continued Note 7 - Segment Reporting Effective January 1, 2000, the Company significantly modified management's internal reporting system with the consolidation of its individual bank charters. In prior periods, the Company's reportable segments were based on legal entities that were aligned along geographic regions. With the consolidation of the bank charters, SunTrust Bank is now one legal entity with Florida, Georgia, Tennessee, Alabama and Mid-Atlantic regions (which includes Virginia, Maryland and the District of Columbia). As a result of the changes to the legal entity structure, as well as the changes made to management's internal system used to evaluate operating segment performance, prior periods have not been reported because it is not practicable to restate prior period results to conform to the current reporting methods or to present current year results based on prior period reportable segments. The Company's reportable segments as of June 30, 2000 are determined based on management's internal reporting approach. The reportable segments are comprised of the four regions of Florida, Georgia, Tennessee (which includes the branches in Alabama) and Mid-Atlantic, in addition to Corporate and Investment Banking and Parent/Other. Each geographic operating segment provides a wide array of banking services to consumer and commercial customers and earns interest income from loans made to customers. In addition, these geographic segments recognize certain fees related to trust, deposit, lending and other services provided to customers. The Corporate and Investment Banking segment consists of corporate banking for the large corporate and identified industry specialties, as well as SunTrust Equitable Securities and SunTrust Leasing. The Parent/Other segment consists primarily of the Company's credit card bank and nonbank subsidiaries as well as certain treasury and corporate expenses. The Treasury/Reconciling Items Segment includes the net impact of transfer pricing on loan and deposit balances, the cost of external debt, gains and losses on the investment portfolio, income taxes and other amounts necessary to reconcile the Company's internal management accounting practices described below to the consolidated financial statements. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not comparable with SunTrust's consolidated results or with similar information presented by any other financial institution. In addition, operating segment results may be restated in the future as management's structure, information needs, and reporting systems evolve. The Company uses a transfer pricing process to aid in assessing operating segment performance. This process involves matched maturity transfer pricing of interest rates for assets and liabilities to determine a contribution to the net interest margin on a segment basis. Currently, the Company does not allocate corporate equity to the reportable segments. As a result, the difference between the matched maturity transfer pricing and the consolidated net interest margin, as well as the net interest margin benefit provided from equity are treated as reconciling items. In addition, the Company uses a credit risk premium approach to aid in assessing operating segment performance. This approach recognizes the cost of the credit losses that SunTrust can expect over time on its loans through a charge against earnings. The premium is judgmental but based on rates derived from the Company's loss migration history for various loan categories as well as the internal credit ratings of individual loans in certain of those loan categories. The difference between the credit risk premium charged to the segments and the Company's consolidated provision for loan losses is included as a reconciling item within noninterest expense. The segment results also include certain intercompany transactions that were recorded at cost. All intercompany transactions have been eliminated to determine the consolidated balances. No transactions with a single customer contributed 10% or more to the Company's total revenue. The following tables disclose selected financial information for SunTrust's reportable business segments for the three months and six months ended June 30, 2000. 11
Three Months Ended June 30, 2000 ------------------------------------------------------------------------------------------------ Corporate & Investment (In thousands) Florida Georgia Tennessee Mid-Atlantic Banking Parent/Other ------------------------------------------------------------------------------------------------ Net interest income $ 213,282 $ 126,336 $ 58,004 $ 180,260 $ 60,100 $ 1,781 Noninterest income 138,766 85,290 38,371 93,999 33,211 379,325 Noninterest expense 204,344 126,636 59,591 155,970 41,798 398,726 ------------------------------------------------------------------------------------------------ Income before taxes 147,704 84,990 36,784 118,289 51,513 (17,620) Income tax expense - - - - - (22,057) ------------------------------------------------------------------------------------------------ Net income $ 147,704 $ 84,990 $ 36,784 $ 118,289 $ 51,513 $ 4,437 ================================================================================================ Average total assets $ 21,465,873 $ 12,278,943 $ 6,131,066 $ 12,533,716 $ 16,684,548 $ 32,583,276 ================================================================================================ Revenues from external customers Total net interest income $ 213,162 $ 126,273 $ 57,966 $ 180,260 $ 60,100 $ 2,002 Total noninterest income 109,593 70,129 30,116 80,401 32,884 133,119 ------------------------------------------------------------------------------------------------ Total income $ 322,755 $ 196,402 $ 88,082 $ 260,661 $ 92,984 $ 135,121 ================================================================================================ Revenues from affiliates Total net interest income $ 120 $ 63 $ 38 $ - $ - $ (221) Total noninterest income 29,173 15,161 8,255 13,598 327 246,206 ------------------------------------------------------------------------------------------------ Total income $ 29,293 $ 15,224 $ 8,293 $ 13,598 $ 327 $ 245,985 ================================================================================================ Three Months Ended June 30, 2000 -------------------------------------------------- Treasury/ Reconciling (In thousands) Items Eliminations Consolidated -------------------------------------------------- Net interest income $ 129,267 (1) $ - $ 769,030 Noninterest income (12,272)(2) (312,720) 443,970 Noninterest expense 73,132 (3) (312,720) 747,477 -------------------------------------------------- Income before taxes 43,863 - 465,523 Income tax expense 170,111 (4) - 148,054 -------------------------------------------------- Net income $ (126,248) $ - $ 317,469 ================================================== Average total assets $ 54,088,329 $(58,268,497) $ 97,497,254 ================================================== Revenues from external customers Total net interest income $ 129,267 $ - $ 769,030 Total noninterest income (12,272) - 443,970 -------------------------------------------------- Total income $ 116,995 $ - $ 1,213,000 ================================================== Revenues from affiliates Total net interest income $ - $ - $ - Total noninterest income - (312,720) - -------------------------------------------------- Total income $ - $ (312,720) $ - ==================================================
Six Months Ended June 30, 2000 ----------------------------------------------------------------------------------------------- Corporate & Investment (In thousands) Florida Georgia Tennessee Mid-Atlantic Banking Parent/Other ----------------------------------------------------------------------------------------------- Net interest income $ 422,133 $ 256,106 $ 117,244 $ 358,507 $ 126,809 $ 1,322 Noninterest income 273,700 173,257 74,822 193,290 62,976 745,817 Noninterest expense 412,417 257,555 119,398 330,339 83,597 763,557 ----------------------------------------------------------------------------------------------- Income before taxes 283,416 171,808 72,668 221,458 106,188 (16,418) Income tax expense - - - - - (25,799) ----------------------------------------------------------------------------------------------- Net income $ 283,416 $ 171,808 $ 72,668 $ 221,458 $ 106,188 $ 9,381 =============================================================================================== Average total assets $ 21,083,452 $ 11,710,878 $6,041,042 $ 12,468,960 $ 16,390,782 $ 29,780,093 =============================================================================================== Revenues from external customers Total net interest income $ 421,906 $ 256,004 $ 117,172 $ 358,507 $ 126,809 $ 1,723 Total noninterest income 220,746 143,517 58,999 158,639 62,118 239,545 ----------------------------------------------------------------------------------------------- Total income $ 642,652 $ 399,521 $ 176,171 $ 517,146 $ 188,927 $ 241,268 =============================================================================================== Revenues from affiliates Total net interest income $ 227 $ 102 $ 72 $ - $ - $ (401) Total noninterest income 52,954 29,740 15,823 34,651 858 506,272 ----------------------------------------------------------------------------------------------- Total income $ 53,181 $ 29,842 $ 15,895 $ 34,651 $ 858 $ 505,871 ===============================================================================================
Six Months Ended June 30, 2000 ---------------------------------------------------- Treasury/ Reconciling (In thousands) Items Eliminations Consolidated ---------------------------------------------------- Net interest income $ 269,502 (1) $ - $ 1,551,623 Noninterest income (2,742) (2) (640,298) 880,822 Noninterest expense 147,519 (3) (640,298) 1,474,084 ---------------------------------------------------- Income before taxes 119,241 - 958,361 Income tax expense 347,252 (4) - 321,453 ---------------------------------------------------- Net income $ (228,011) $ - $ 636,908 ==================================================== Average total assets $ 55,237,671 $(56,257,559) $96,455,319 ==================================================== Revenues from external customers Total net interest income $ 269,502 $ - $ 1,551,623 Total noninterest income (2,742) - 880,822 ---------------------------------------------------- Total income $ 266,760 $ - $ 2,432,445 ==================================================== Revenues from affiliates Total net interest income $ - $ - $ - Total noninterest income - (640,298) - ---------------------------------------------------- Total income $ - $ (640,298) $ - ==================================================== (1) The Company's reconciliation of total segment results to consolidated results includes adjustments for funds transfer pricing credits and charges related to funds provided and funds used, credits for loan loss reserves, and credits for equity. (2) Includes the effect of sales of securities, sales of fixed assets and other items. (3) Includes miscellaneous corporate expenses not allocated to the operating segments. (4) Reflects provision for income taxes that management does not include in its internal reporting system. 12 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 1,151 full-service branches, including supermarket branches, and continues to leverage technology to provide customers the convenience of banking on the internet, through 1,981 automated teller machines and via twenty-four hour telebanking. The following analysis of the financial performance of SunTrust for the second quarter of 2000 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 six months ended June 30, 2000 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 $329.3 million and $657.6 million for the second quarter and first six months of 2000, an increase of 6.7% and 9.5% compared with $308.5 million and $600.6 million in the same periods of 1999 (excluding after-tax merger-related charges of $11.8 million, $20.7 million, $14.8 million and $25.2 million for the second quarter and the first six months of 2000 and 1999, respectively). Diluted earnings per share, adjusted for merger charges, grew 14.0% to $1.09 and 16.0% to $2.16 from $0.96 and $1.86 in the same periods last year. Reported net income was $317.5 million, or $1.05 per diluted share for the second quarter and $636.9 million, or $2.09 per diluted share for the first six months of 2000. Net income growth for the first six months of 2000 compared to 1999 was impacted by lower loan loss provision resulting from the fourth quarter credit card sale, lower expense levels, and a lower effective tax rate. 13
Selected Quarterly Financial Data Table 1 (Dollars in millions except per share data) Quarters -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- 2 1 4 3 2 -------------- -------------- ------------- ------------- -------------- Summary of Operations Interest and dividend income $ 1,672.0 $ 1,610.8 $ 1,559.4 $ 1,506.4 $ 1,452.5 Interest expense 903.0 828.2 763.4 711.4 667.8 -------------- -------------- ------------- ------------- -------------- Net interest income 769.0 782.6 796.0 795.0 784.7 Provision for loan losses 27.7 22.3 33.1 46.5 48.8 -------------- -------------- ------------- ------------- -------------- Net interest income after provision for loan losses 741.3 760.3 762.9 748.5 735.9 Noninterest income(1) 444.0 436.9 299.2 446.1 452.9 Noninterest expense(2) 719.8 704.3 753.9 691.8 735.9 -------------- -------------- ------------- ------------- -------------- Income before provision for income taxes and extraordinary gain 465.5 492.8 308.2 502.8 452.9 Provision for income taxes 148.0 173.4 81.0 181.4 159.2 -------------- -------------- ------------- ------------- -------------- Income before extraordinary gain 317.5 319.4 227.2 321.4 293.7 Extraordinary gain, net of taxes(3) - - 202.6 - - -------------- -------------- ------------- ------------- -------------- Net income $ 317.5 $ 319.4 $ 429.8 $ 321.4 $ 293.7 ============== ============== ============= ============= ============== Net interest income (taxable-equivalent) $ 778.7 $ 792.1 $ 806.5 $ 805.4 $ 795.4 Per common share Diluted Income before extraordinary gain $ 1.05 $ 1.04 $ 0.71 $ 1.00 $ 0.91 Extraordinary gain, net of taxes - - 0.64 - - -------------- -------------- ------------- ------------- -------------- Net income 1.05 1.04 1.35 1.00 0.91 Basic Income before extraordinary gain 1.06 1.05 0.72 1.01 0.92 Extraordinary gain, net of taxes - - 0.64 - - -------------- -------------- ------------- ------------- -------------- Net income 1.06 1.05 1.36 1.01 0.92 Dividends declared 0.370 0.370 0.345 0.345 0.345 Book value 25.10 23.51 24.73 24.50 25.47 Market price High 66.00 68.06 76.00 70.88 73.00 Low 45.06 46.81 64.19 61.56 63.06 Close 45.69 57.75 68.81 65.75 69.44 Selected Average Balances Total assets $97,497.3 $ 95,413.4 $ 94,804.6 $ 92,447.7 $ 92,304.2 Earning assets 88,200.6 85,857.5 84,447.9 82,517.2 81,329.1 Loans 69,830.6 67,030.0 64,941.7 62,859.8 61,973.8 Total deposits(4) 66,866.4 65,550.3 58,284.0 58,423.6 57,743.7 Realized shareholders' equity 5,948.9 6,023.3 6,496.4 6,522.5 6,328.2 Total shareholders' equity 7,195.9 7,476.2 8,083.1 8,210.7 8,322.5 Common shares - diluted (thousands) 302,141 306,739 317,701 322,223 322,448 Common shares - basic (thousands) 298,986 303,461 313,706 318,239 318,315 Financial Ratios(5) ROA 1.34 % 1.38 % 1.85 % 1.42 % 1.32 % ROE 21.46 21.33 26.25 19.55 18.61 Net interest margin 3.55 3.71 3.79 3.87 3.92
(1) Includes securities losses of $114.9 million for the fourth quarter of 1999 related to the securities portfolio repositioning. (2) Includes merger-related expenses of $18.2 million and $13.6 million for the second and first quarters of 2000 and $7.1 million, $7.1 million, $17.6 million and $13.8 million for the fourth, third, second and first quarters of 1999, respectively. (3) Represents the gain on sale of the Company's consumer credit card portfolio during the fourth quarter of 1999, net of $124.6 million in taxes. (4) Includes brokered and foreign deposits of $12.9 and $12.2 billion for the second and first quarters of 2000 and $4.1 billion, $4.5 billion, $4.2 billion and $3.6 billion for the fourth, third, second and first quarters of 1999, respectively. (5) Calculated excluding net unrealized gains on securities available for sale because the net unrealized gains are not included in income. 14 Consolidated Daily Average Balances, Income/Expense and Average Yields Earned and Rates Paid (Dollars in millions; yields on taxable-equivalent basis)
Quarter Ended ------------------------------------------------------------------------------------------------------------------------------------ June 30, 2000 March 31, 2000 ------------------------------------------------------------------------------------------------------------------------------------ Average Income/ Yields/ Average Income/ Yields/ Balances Expense Rates Balances Expense Rates ------------------------------------------------------------------------------------------------------------------------------------ Assets Loans:(1) Taxable $ 68,789.8 $ 1,354.7 7.92 % $65,975.8 $1,293.9 7.89 % Tax-exempt(2) 1,040.8 19.8 7.65 1,054.2 19.6 7.48 ------------------------------------- ----------------------------------- Total loans 69,830.6 1,374.5 7.92 67,030.0 1,313.5 7.88 Securities available for sale: Taxable 14,483.6 242.7 6.74 15,032.5 247.6 6.63 Tax-exempt(2) 470.0 8.9 7.65 508.5 9.4 7.42 ------------------------------------- ------------------------------------ Total securities available for sale 14,953.6 251.6 6.77 15,541.0 257.0 6.65 Funds sold 1,537.5 24.5 6.41 1,309.5 19.3 5.94 Loans held for sale 1,279.7 23.7 7.45 1,437.1 25.1 7.03 Other short-term investments(2) 599.2 7.4 4.95 539.9 5.4 4.02 ------------------------------------- ----------------------------------- Total earning assets 88,200.6 1,681.7 7.67 85,857.5 1,620.3 7.59 Allowance for loan losses (873.8) (874.7) Cash and due from banks 3,322.7 3,395.3 Premises and equipment 1,627.5 1,627.8 Other assets 3,204.3 3,058.3 Unrealized gains on securities available for sale 2,016.0 2,349.2 ------------------------------------- ----------------------------------- Total assets $ 97,497.3 $95,413.4 ===================================== =================================== Liabilities and Shareholders' Equity Interest-bearing deposits: NOW/Money market accounts $ 20,194.3 $ 155.7 3.10 % $20,397.8 $ 146.1 2.88 % Savings 6,449.1 55.1 3.43 6,659.4 53.8 3.25 Consumer time 10,023.1 129.4 5.19 9,599.9 116.6 4.89 Other time 4,024.7 58.1 5.80 3,756.0 49.4 5.29 Brokered deposits 2,760.9 43.9 6.40 2,585.0 38.4 5.97 Foreign deposits 10,162.9 148.0 5.86 9,605.0 150.7 6.31 ------------------------------------- ----------------------------------- Total interest-bearing deposits 53,615.0 590.2 4.43 52,603.1 555.0 4.24 Funds purchased 10,268.0 154.6 6.05 10,465.1 142.8 5.49 Other short-term borrowings 1,546.9 25.7 6.67 1,402.2 18.9 5.43 Long-term debt 8,070.9 132.5 6.60 6,952.9 111.5 6.45 ------------------------------------- ----------------------------------- Total interest-bearing liabilities 73,500.8 903.0 4.94 71,423.3 828.2 4.66 Noninterest-bearing deposits 13,251.5 12,947.2 Other liabilities 3,549.0 3,566.7 Realized shareholders' equity 5,948.9 6,023.3 Accumulated other comprehensive income 1,247.1 1,452.9 ------------------------------------- ----------------------------------- Total liabilities and shareholders' equity $ 97,497.3 $95,413.4 ===================================== =================================== Interest rate spread 2.73 % 2.93 % ------------------------------------- ----------------------------------- Net Interest Income $ 778.7 $ 792.1 ------------------------------------- ----------------------------------- Net Interest Margin(3) 3.55 % 3.71 % ------------------------------------- -----------------------------------
(1) Interest income includes loan fees of $32.8, $31.7, and $34.7 in the quarters ended June 30, March 31, 2000, and June 30,1999 and $65.3 and $68.1 in the six months ended June 30, 2000 and 1999. 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 $9.6, $9.5, and $10.7 in the quarters ended June 30, March 31, 2000, and June 30,1999 and $19.2 and $21.5 in the six months ended June 30, 2000 and 1999. 15
Quarter Ended Six Months Ended ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1999 June 30, 2000 June 30, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Balances Expense Rates Balances Expense Rates Balances Expense Rates ------------------------------------------------------------------------------------------------------------------------------------ $60,837.0 $1,140.4 7.52 % $67,382.8 $2,648.6 7.90 % $60,418.2 $2,269.0 7.57 % 1,136.7 20.0 7.07 1,047.5 39.4 7.56 1,160.8 41.2 7.16 ------------------------------------------------------------------------------------------------------------------------------------ 61,973.7 1,160.4 7.51 68,430.3 2,688.0 7.90 61,579.0 2,310.2 7.57 14,415.3 224.4 6.24 14,758.1 490.3 6.68 14,045.7 438.0 6.29 566.2 11.5 8.10 489.2 18.3 7.53 569.9 23.0 8.13 ------------------------------------------------------------------------------------------------------------------------------------ 14,981.5 235.9 6.31 15,247.3 508.6 6.71 14,615.6 461.0 6.36 1,321.8 16.5 5.02 1,423.5 43.8 6.19 1,283.2 32.0 5.03 2,759.4 47.3 6.88 1,358.4 48.8 7.23 3,214.2 105.9 6.65 292.7 3.1 4.26 569.6 12.8 4.51 316.7 6.9 4.41 ------------------------------------------------------------------------------------------------------------------------------------ 81,329.1 1,463.2 7.22 87,029.1 3,302.0 7.63 81,008.7 2,916.0 7.26 (949.1) (874.3) (949.5) 3,599.7 3,359.0 3,594.3 1,598.1 1,627.7 1,564.0 3,502.5 3,131.3 3,535.0 3,223.9 2,182.6 3,249.6 ------------------------------------------------------------------------------------------------------------------------------------ $92,304.2 $96,455.4 $92,002.1 ==================================================================================================================================== $19,833.1 $ 126.5 2.56 % $20,296.0 $ 301.8 2.99 % $19,703.3 $ 253.7 2.60 % 7,003.4 49.9 2.86 6,554.3 108.9 3.34 6,981.7 100.5 2.90 9,815.2 116.2 4.75 9,811.5 246.0 5.04 9,915.0 237.5 4.83 4,011.9 48.8 4.88 3,890.3 107.5 5.56 4,121.3 100.8 4.93 3.3 4.87 2,673.0 82.3 6.20 1.7 - - 4,170.8 50.3 4.84 9,884.0 298.7 6.08 3,910.9 93.3 4.81 ------------------------------------------------------------------------------------------------------------------------------------ 44,837.7 391.7 3.50 53,109.1 1,145.2 4.34 44,633.9 785.8 3.55 14,849.3 172.4 4.66 10,366.6 297.4 5.77 14,817.5 341.7 4.65 1,448.1 16.8 4.65 1,474.5 44.6 6.09 1,611.7 37.1 4.64 5,741.4 86.9 6.07 7,511.9 244.0 6.53 5,764.2 175.3 6.13 ------------------------------------------------------------------------------------------------------------------------------------ 66,876.5 667.8 4.00 72,462.1 1,731.2 4.80 66,827.3 1,339.9 4.04 12,906.0 13,099.3 12,688.0 4,199.2 3,557.9 4,251.7 6,328.2 5,986.1 6,224.7 1,994.3 1,350.0 2,010.4 ------------------------------------------------------------------------------------------------------------------------------------ $92,304.2 $96,455.4 $92,002.1 ==================================================================================================================================== 3.22 % 2.83 % 3.22 % ------------------------------------------------------------------------------------------------------------------------------------ $ 795.4 $1,570.8 $1,576.1 ------------------------------------------------------------------------------------------------------------------------------------ 3.92 % 3.63 % 3.92 % ------------------------------------------------------------------------------------------------------------------------------------
(3) Derivative instruments used to help balance SunTrust's interest-sensitivity position increased net interest income $0.8, $5.8 in the quarters ended June 30, 2000 and 1999, decreased net interest income $0.7 in the quarter ended March 31, 2000, and increased net interest income $0.1 and $10.7 in the six months ended June 30, 2000 and 1999. Without these swaps, the net interest margin would have been 3.55%, 3.71%, and 3.89% in the quarters ended June 30 and March 31, 2000, and June 30,1999,and 3.63% and 3.90% for the six months ended June 30, 2000 and 1999. 16 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 less than 1.0% 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 3.63% for the first six months of 2000, a decrease of 29 basis points from the first six months of 1999, primarily attributable to the rising rate environment, the sale of the Company's $1.5 billion higher yielding consumer credit card portfolio in the fourth quarter of 1999 and additional purchases under the SunTrust stock repurchase program. Compared to the first six months of 1999, the rate on earning assets increased 37 basis points to 7.63% in the first six months of 2000 and the rate on interest bearing liabilities increased 76 basis points to 4.80% primarily due to the rising rates on purchased liabilities and increased reliance on purchased liabilities to fund growth. Interest income that SunTrust was unable to recognize on nonperforming loans had a negative impact of 2 and 1 basis points on the net interest margin in the first six months of 2000 and 1999, respectively. Noninterest Income. Noninterest income in the second quarter and first six months of 2000, adjusted to exclude the effect of securities gains and losses, decreased $6.6 million, or 1.5% and $5.1 million, or 0.8%, from the comparable periods last year. The decrease primarily relates to mortgage production income which decreased $62.0 million, or 61.3% for the first six months of 2000, due to a drop in refinancing activities resulting from the rising rate environment. Included in credit card and other fees is debit card interchange income of $14.6 million and $27.9 million for second quarter and the first six months of 2000 compared to $18.8 million and $33.7 million in the same periods of 1999. Trust income, SunTrust's largest source of noninterest income, increased $3.0 million, or 1.2% for the first six months of 2000 compared to the same period last year. Net new businesss in 2000 has not grown as much as the same period in 1999, and the market value of trust assets under management is down to $92.8 billion in June 2000, from $95.5 billion in June 1999. The Company expects that lower than historical growth rates will continue throughout the year 2000. Other income in the second quarter of 2000 includes $2.5 million in net gains on the sale of mortgage and student loans. The third quarter of 1999 includes a $6.8 million gain on the sale of student loans. The second quarter of 1999 includes an $8.5 million gain on the sale of student loans. In addition, the Company incurred securities losses of $114.9 million during the fourth quarter of 1999 primarily related to a portfolio repositioning program undertaken by the Company. 17
Noninterest Income Table 3 (In millions) Quarters ----------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------- 2 1 4 3 2 ------------- ------------ ----------- ----------- ----------- Trust income $ 125.3 $ 130.3 $ 123.8 $ 126.4 $ 126.3 Service charges on deposit accounts 112.6 111.3 113.3 111.6 107.1 Miscellaneous charges and fees 48.8 47.4 48.1 49.0 49.3 Retail investment services 30.5 30.8 24.0 23.9 26.0 Credit card and other fees 24.4 22.1 25.7 29.2 28.2 Mortgage production related income 20.5 18.7 25.2 26.7 47.6 Mortgage servicing related income 7.7 7.7 7.5 11.5 5.1 Corporate and institutional investment services 35.3 19.7 19.6 13.2 16.3 Trading account profits and commissions (1.4) 12.0 6.9 6.2 11.4 Other income 38.8 30.0 20.0 45.8 31.7 Securities gains (losses) 1.5 6.9 (114.9) 2.6 3.9 ------------- ------------ ----------- ----------- ----------- Total noninterest income $ 444.0 $ 436.9 $ 299.2 $ 446.1 $ 452.9 ============= ============ =========== =========== ===========
Noninterest Expense. Noninterest expense decreased $16.1 million, or 2.2% and $35.5 million, or 2.4% in the second quarter and first six months of 2000 compared to the same periods last year. Personnel expenses, consisting of salaries, other compensation and employee benefits, decreased $24.1 million, or 5.6% and $33.3 million, or 3.9% from the earlier periods. The reduction in other compensation of $15.8 compared to the same quarter last year is due to adjustments of business line incentive plan expense which occurred during the second quarter. The efficiency ratio in the second quarter of 2000 improved to 58.87%, a decrease from 58.95% in the second quarter of 1999. In 1999, merger-related expenses included additional severance, accelerated depreciation and system conversion costs. In the second quarter of 2000, these merger-related expenses primarily related to accelerated depreciation and miscellaneous integration costs. Merger-related expenses were $18.2 million and $13.6 million for the second and first quarters of 2000 and $7.1 million, $7.1 million,$17.6 million and $13.8 million for the fourth, third, second and first quarters of 1999, respectively.
Noninterest Expense Table 4 (In millions) Quarters -------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------- 2 1 4 3 2 ------------- ----------- ---------- ---------- ---------- Salaries $ 292.1 $ 287.3 $ 287.1 $ 288.5 $ 300.4 Other compensation 73.1 83.8 93.9 80.9 88.9 Employee benefits 41.4 56.9 40.2 39.7 41.5 Equipment expense 50.7 51.6 55.4 48.0 49.8 Net occupancy expense 49.9 50.1 50.0 49.8 49.9 Outside processing and software 44.4 41.6 39.8 37.0 38.7 Marketing and customer development 27.9 22.3 35.0 24.7 23.9 Postage and delivery 16.3 16.7 17.3 16.3 17.4 Communications 15.4 15.2 16.1 16.5 17.6 Credit and collection services 16.0 14.3 15.1 17.8 19.2 Merger-related expenses 18.2 13.6 7.1 7.1 17.6 Operating supplies 12.6 12.2 13.6 10.7 14.3 Consulting and legal 18.2 11.8 18.5 13.0 15.6 Amortization of intangible assets 8.8 9.0 6.3 8.6 9.0 Other expense 34.8 17.9 58.5 33.2 32.1 ------------- ----------- ---------- ---------- ---------- Total noninterest expense $ 719.8 $ 704.3 $ 753.9 $ 691.8 $ 735.9 ============= =========== ========== ========== ========== Efficiency ratio 58.9 % 57.3 % 68.2 % 55.3 % 58.9 %
18 Provision for Loan Losses. The SunTrust Allowance Committee meets at least quarterly to assess the adequacy of the allowance, analyze provision and charge-off trends and affirm allowance methodology. As a result of this review process, the committee deemed the allowance as of June 30, 2000 to be adequate to cover losses inherent in the loan portfolio. The adequacy of the allowance is evaluated based on historical loss rates, specifically analyzed loans and other internal and external factors that affect credit risk. These other factors, such as the rising interest rate environment of the last six quarters, increasing consumer debt levels, recent volatility in the financial markets, and known current events that affect the Company's primary market area, are key elements in the assessment of the adequacy of the allowance because of their impact on borrowers' repayment capacity. Charge-offs in the second quarter of 2000 were lower than in the same period last year, mainly due to the sale of the consumer credit card portfolio. The Company anticipates that higher levels of problem loans in the corporate market, particularly in the industry segments referenced below, will lead to a slight increase in net charge-offs during the rest of 2000. Nonperforming loans increased from June 30, 1999, primarily due to structural changes in the healthcare industry. Other industry sectors, however, are beginning to feel pressure from rising interest rates and the softening economy, leading SunTrust to anticipate further increases in nonperforming loans during the remainder of the year. Besides healthcare, the Company is concerned about weakening in textiles and agri-business, particularly poultry products. SunTrust lowered the provision for loan losses in the first six months of 2000 to $50.0 million from $90.8 million in the same period last year. This reduction in the provision is almost entirely due to the sale of the Company's consumer credit card portfolio in November 1999. The credit card portfolio previously accounted for up to $20 million in net charge-offs and provision expense each quarter. The ratio of net charge-offs to average loans dropped to .14% from .26% one year ago. Total provision exceeded net charge-offs by $3.2 million. At June 30, 2000, SunTrust's allowance for loan losses totaled $874.5 million which was 1.22% of period loans and 309.6% of total nonperforming loans. Both ratios decreased from the second quarter of 1999. As of June 30, 1999, the allowance totaled $941.4 million, or 1.50% of period loans and 392.9% of total nonperforming loans. These decreases are primarily attributable to the sale of the consumer credit card portfolio, which had a relatively high level of allowance for loan losses and no nonperforming loans. 19
Summary of Loan Loss Experience Table 5 (Dollars in millions) Quarters ------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------ 2 1 4 3 2 -------------- -------------- -------------- -------------- -------------- Allowance for Loan Losses Balances - beginning of quarter $ 874.0 $ 871.3 $ 947.2 $ 941.4 $ 952.6 Allowance from acquisitions and other activity - net - - - 0.1 (13.4) Provision for loan losses 27.7 22.3 33.1 46.5 48.8 Charge-offs: Commercial (23.5) (16.3) (84.4) (21.4) (24.0) Real estate: Construction (0.1) - (0.3) (1.1) (0.1) Residential mortgages (2.2) (2.2) (4.8) (3.5) (3.6) Other (0.9) (0.3) (1.1) (0.9) (2.6) Credit card (0.9) (1.2) (18.6) (18.2) (19.4) Other consumer loans (12.6) (15.3) (14.6) (11.6) (13.7) -------------- -------------- -------------- -------------- -------------- Total charge-offs (40.2) (35.3) (123.8) (56.7) (63.4) -------------- -------------- -------------- -------------- -------------- Recoveries: Commercial 4.6 4.6 3.7 3.8 4.0 Real estate: Construction - 0.1 - 0.1 0.4 Residential mortgages 0.7 0.6 0.2 1.6 0.8 Other 0.2 1.8 1.6 0.6 1.3 Credit card 0.6 1.5 2.7 2.7 3.3 Other consumer loans 6.9 7.1 6.6 7.1 7.0 -------------- -------------- -------------- -------------- -------------- Total recoveries 13.0 15.7 14.8 15.9 16.8 -------------- -------------- -------------- -------------- -------------- Net charge-offs (27.2) (19.6) (109.0) (40.8) (46.6) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Balance - end of quarter $ 874.5 $ 874.0 $ 871.3 $ 947.2 $ 941.4 ============== ============== ============== ============== ============== Quarter-end loans outstanding $ 71,450.4 $ 68,614.4 $ 66,002.8 $ 64,189.3 $ 62,922.4 Average loans 69,830.6 67,030.0 64,941.7 62,859.8 61,973.7 Allowance to quarter-end loans 1.22 % 1.27 % 1.32 % 1.48 % 1.50 % Allowance to nonperforming loans 309.6 306.8 350.0 398.6 392.9 Net charge-offs to average loans (annualized) 0.16 0.12 0.67 0.26 0.30 Provision to average loans (annualized) 0.16 0.13 0.20 0.29 0.32 Recoveries to total charge-offs 32.3 44.5 12.0 28.0 26.5
20
Nonperforming Assets Table 6 (Dollars in millions) 2000 1999 ------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 ------------- -------------- --------------- ---------------- ----------- Nonperforming Assets Nonaccrual loans: Commercial $ 149.1 $ 129.6 $ 105.0 $ 82.3 $ 85.4 Real Estate: Construction 1.8 4.7 9.0 11.8 14.0 Residential mortgages 75.6 84.0 82.6 85.9 80.7 Other 27.4 37.8 34.9 45.8 48.0 Consumer loans 28.6 28.8 17.4 11.8 11.5 ------------- -------------- ------------- -------------- ------------- Total nonaccrual loans 282.5 284.9 248.9 237.6 239.6 Restructured loans - - - 0.1 - ------------- -------------- ------------- -------------- ------------- Total nonperforming loans 282.5 284.9 248.9 237.7 239.6 Other real estate owned 23.2 27.0 26.8 24.2 28.2 ------------- -------------- ------------- -------------- ------------- Total nonperforming assets $ 305.7 $ 311.9 $ 275.7 $ 261.9 $ 267.8 ============= ============== ============= ============== ============= Ratios: Nonperforming loans to total loans 0.40 % 0.42 % 0.38 % 0.37 % 0.38 % Nonperforming assets to total loans plus other real estate owned 0.43 0.45 0.42 0.41 0.43 Accruing Loans Past Due 90 Days or More $ 189.4 $ 160.1 $ 117.4 $ 113.1 $ 101.7
Nonperforming Assets. Nonperforming assets consist of nonaccrual loans, restructured loans and other real estate owned. Nonperforming assets have increased 10.9%, or $30.0 million since December 31, 1999 and increased 14.2%, or $37.9 million since June 30, 1999. Much of the increase since June 30, 1999 occurred in healthcare credits, an industry sector that continues to experience structural change and intense market pressures. Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. During the first six months of 2000, an additional $7.4 million of interest income would have been recorded if all nonaccrual and restructured loans had been accruing interest according to their original contract terms. Interest income recognized on nonperforming loans using the cash basis in the first six months of 2000 was $7.7 million. 21
Loan Portfolio by Types of Loans Table 7 (In millions) 2000 1999 --------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 --------------- --------------- --------------- --------------- --------------- Commercial $ 30,209.5 $ 29,639.6 $ 26,933.5 $ 24,918.3 $ 24,772.2 Real estate: Construction 2,647.2 2,600.8 2,457.1 2,348.0 2,240.8 Residential mortgages 20,295.0 19,643.1 19,619.3 18,696.6 18,237.1 Other 7,851.5 7,937.4 7,794.9 7,656.1 7,523.5 Credit card 75.4 98.7 77.4 1,497.2 1,476.6 Other consumer loans 10,371.8 8,694.8 9,120.6 9,073.1 8,672.2 --------------- --------------- --------------- --------------- --------------- Total loans $ 71,450.4 $ 68,614.4 $ 66,002.8 $ 64,189.3 $ 62,922.4 =============== =============== =============== =============== ===============
Loans. Total loans at June 30, 2000 were $71.5 billion, an increase of $8.5 billion or 13.6% from June 30, 1999. The Company recorded significant loan growth in commercial loans and other consumer loans, up 21.9% and 19.6% from June 30, 1999, respectively, while continuing to realize steady growth in its residential mortgage portfolio (up 11.3%), as customers shifted from fixed rate to adjustable rate mortgages. Of the $20.3 billion in residential mortgages at June 30, 2000, $2.1 billion were home equity loans, which also demonstrated significant growth (14.3%) in the last twelve months. The drop in credit card loans from June 30, 1999 reflects te sale of the Company's $1.5 billion consumer credit card portfolio during the fourth quarter of 1999. Income Taxes. The provision for income taxes was $148.1 million and $321.5 in the second quarter and first six months of 2000 compared to $159.3 million and $309.5 in the same periods last year. This represents a 34% effective tax rate for the six months ended June 30, 2000, compared to 35% for the same period last year. Securities available for sale. Securities in the investment portfolio are classified as available-for-sale and are carried at market value with unrealized gains and losses, net of any tax effect, included in accumulated other comprehensive income and added to or deducted from realized shareholders' equity to determine total shareholders' equity. The investment portfolio continues to be proactively 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 6.31% in the second quarter of 1999 to 6.77% in the second quarter of 2000 primarily due to the repositioning of the securities portfolio during the fourth quarter of 1999 to take advantage of higher market rates. At June 30, 2000 the portfolio size (measured at amortized cost) decreased by $800 million from December 31, 2000. At June 30, 2000, approximately 3% of the portfolio consisted of U.S. Treasury securities, 15% U.S. government agency securities, 47% mortgage-backed securities, 8% asset-backed securities, 20% 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 limiting the credit risk associated with the mortgage loans. At June 30, 2000, the carrying value of the securities portfolio was $2.4 billion over amortized cost, consisting of a $2.8 billion unrealized gain on SunTrust's investment in common stock of The Coca-Cola Company and other unrealized net losses. The market value of this common stock investment increased $507.0 million during the second quarter of 2000, which did not affect the net income of SunTrust, but was included in comprehensive income. 22 Liquidity Management. Liquidity is managed to ensure there is sufficient cash flow 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 SunTrust's liquidity position. Liquidity is enhanced by an investment portfolio structured to provide liquidity as needed. It is also strengthened by ready access to a diversified base of regional and national wholesale funding sources including fed funds purchased, securities sold under agreements to repurchase, negotiable certificates of deposit and offshore deposits, as well as a bank note program, commercial paper issuance by the Parent Company, and Federal Home Loan Bank advances. Total deposits consist of consumer deposits, commercial deposits and purchased deposits. The purchased deposits include foreign and brokered deposits. Total deposits as of June 30, 2000 grew $8.3 billion, or 13.8%, from June 30, 1999. Consumer and commercial deposits decreased $443.9 million, or 0.8% while purchased deposits grew $8.8 billion, or 165.2%. Consumer and commercial deposits represented 80.7% of average deposits for the second quarter of 2000 compared to 92.8% for the same period of 1999. Net borrowed funds, which primarily include short term funds purchased and sold, purchased deposits, other short term borrowings and long term debt, were $32.8 billion for the second quarter of 2000 compared with $26.2 billion for the same period in 1999. The increase is primarily due to the Company's increased use of purchased deposits and long term debt. Net borrowed funds were 37.2% of average earning assets for the second quarter of 2000 as compared to 32.2% in the same period a year ago. On April 28, 2000, the Company issued $300 million of 7.75% subordinated notes due May 1, 2010. The Company intends to use the net proceeds from the sale of the subordinated notes for general corporate purposes. Derivatives. SunTrust enters into various derivative contracts to meet the financial needs of its customers, generate revenue through trading activities, and to manage interest rate sensitivity for the bank. These derivative instruments include futures and forward contracts, interest rate swaps, options, interest rate caps and floors, and swaptions. 23 When acting in a dealer capacity for customers, SunTrust will enter into offsetting positions to eliminate exposure to interest rate and market risk. Derivative instruments used to manage the bank's interest rate sensitivity and the generation of revenue through its trading activities as of June 30, 2000 are shown in Table 8.
Derivative Instruments Table 8 (Dollars in thousands) Estimated Fair Value ---------------------------------------------- Weighted Average Average Notional Maturity Received Average Carrying Unrealized Unrealized Balance In Months Rate Pay Rate amount(1) Gains Losses Net ------------------------------------------------------------------------------------------------- Hedges on Lending Commitments Forward Contracts $ 1,824,250 2 - % - % $ - $ 266 $ (8,637) $ (8,371) Hedges on Foreign Currency Forward Contracts 971,002 3 - - - 14,854 (9,075) 5,779 Interest Rate Swaps 1,797,106 45 6.60 6.31 (1,083) 18,860 (10,595) 7,182 Interest Rate Caps/Floors 756,989 27 5.26 (2) - (2,741) 1,240 - (1,501) Futures Contracts 288,000 20 - - - 1,037 (2) 1,035 Options Contracts 20,000 1 6.50 (2) - - - - - --------- Total Derivatives $ 4,124 =========
(1) Carrying amount includes accrued interest receivable or payable and unamortized premiums. (2) Average option strike price. Derivative contracts used in the management of interest rate volatility and trading activities increased net interest income by $0.8 million and $0.1 million in the second quarter and first six months of 2000.
Capital Ratios Table 9 (Dollars in millions) 2000 1999 --------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 --------------- ---------------- -------------- --------------- -------------- Tier 1 capital $ 6,648.7 $ 6,484.3 $ 6,579.6 $ 7,065.0 $ 6,973.2 Total capital 10,342.7 9,754.8 9,939.1 10,314.7 10,543.1 Risk-weighted assets 95,571.5 88,973.4 87,866.1 84,458.9 83,192.0 Risk-based ratios: Tier 1 capital 6.95 % 7.28 % 7.48 % 8.36 % 8.38 % Total capital 10.82 10.96 11.31 12.21 12.67 Tier 1 leverage ratio 7.00 7.00 7.17 7.91 7.86 Total shareholders' equity to assets 7.60 7.40 8.00 8.45 8.79
Capital Resources. Consistent with the objective of operating a sound financial organization, SunTrust maintains capital ratios well above regulatory requirements. The rate of internal capital generation has been adequate to support asset growth. However, the Company's capital ratios have experienced a decline over the last five quarters primarily resulting from additional purchases under the SunTrust stock repurchase program and a decline in the market value of SunTrust's investment in common stock of The Coca-Cola Company. Table 9 presents capital ratios for the five most recent quarters. 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 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 45% of the unrealized gains on equity securities). SunTrust is 24 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. 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 1,159,200 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 August 2, 2000, SunTrust has purchased 10,105,542 shares of common stock under this authorization. On August 8, 2000, the Board of Directors authorized the purchase of up to 10 million shares of SunTrust common stock of the Company, including 1,894,458 shares remaining under the authorization to purchase shares of February 8, 2000. 25 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None 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 14th day of August, 2000. SunTrust Banks, Inc. (Registrant) /s/ W.P. O'Halloran ------------------- William P. O'Halloran Senior Vice President and Controller (Chief Accounting Officer) 26