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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, 2002
---------------------------------------------
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, 2002, 266,230,736 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
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-33
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 34
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, 2002 are not
necessarily indicative of the results that may be expected for the full year
2002.
2
Consolidated Statements of Income
---------------------------------
Three Months
Ended March 31
---------------------------
(Dollars in thousands except per share data) (Unaudited) 2002 2001
------------ ------------
Interest Income
Interest and fees on loans $ 990,243 $ 1,397,659
Interest and fees on loans held for sale 67,566 36,544
Interest and dividends on securities available for sale
Taxable interest 204,495 252,671
Tax-exempt interest 5,611 7,304
Dividends (1) 16,652 17,326
Interest on funds sold 5,252 18,933
Interest on deposits in other banks 1,511 435
Other interest 6,259 13,002
------------ ------------
Total interest income 1,297,589 1,743,874
------------ ------------
Interest Expense
Interest on deposits 301,020 584,261
Interest on funds purchased 35,534 154,430
Interest on other short-term borrowings 4,793 24,056
Interest on long-term debt 158,136 176,270
------------ ------------
Total interest expense 499,483 939,017
------------ ------------
Net Interest Income 798,106 804,857
Provision for loan losses 163,575 67,300
------------ ------------
Net interest income after provision for loan losses 634,531 737,557
------------ ------------
Noninterest Income
Trust and investment management income 129,087 124,309
Service charges on deposit accounts 145,976 120,023
Other charges and fees 70,389 55,539
Mortgage production related income 30,570 31,736
Mortgage servicing related income (6,332) 6,724
Credit card and other fees 31,227 25,588
Retail investment services 31,286 24,783
Investment banking income 44,824 14,089
Trading account profits and commissions 25,658 29,694
Other noninterest income 49,147 36,317
Securities gains 63,450 57,117
------------ ------------
Total noninterest income 615,282 525,919
------------ ------------
Noninterest Expense
Salaries and other compensation 394,219 376,351
Employee benefits 90,755 56,660
Net occupancy expense 54,010 50,013
Equipment expense 43,748 44,545
Outside processing and software 54,269 45,144
Marketing and customer development 25,195 23,033
Merger-related expenses 15,998 --
Amortization of intangible assets 6,532 8,290
Other noninterest expense 152,902 138,661
------------ ------------
Total noninterest expense 837,628 742,697
------------ ------------
Income before provision for income taxes 412,185 520,779
Provision for income taxes 107,304 183,254
------------ ------------
Net Income $ 304,881 $ 337,525
============ ============
Average common shares - diluted 287,375,269 295,832,464
Average common shares - basic 284,054,605 291,804,986
Net income per average common share - diluted $ 1.06 $ 1.14
Net income per average common share - basic 1.07 1.16
(1) Includes dividends on common stock of
The Coca-Cola Company 9,653 8,688
See notes to consolidated financial statements
3
Consolidated Balance Sheets
---------------------------
March 31 December 31 March 31
(Dollars in thousands) (Unaudited) 2002 2001 2001
------------ ------------ ------------
Assets
Cash and due from banks $ 3,110,694 $ 4,229,074 $ 3,259,873
Interest-bearing deposits in other banks 366,775 185,861 242,371
Trading account 1,721,314 1,343,602 1,441,437
Securities available for sale (1) 20,200,519 19,656,391 20,274,510
Funds sold 893,186 1,495,109 996,791
Loans held for sale 3,440,609 4,319,594 2,537,483
Loans 70,849,149 68,959,222 70,360,077
Allowance for loan losses (927,603) (867,059) (871,964)
------------ ------------ ------------
Net loans 69,921,546 68,092,163 69,488,113
Premises and equipment 1,623,543 1,584,869 1,605,144
Goodwill 968,340 440,497 491,105
Intangible assets 659,777 370,779 377,436
Customers' acceptance liability 17,249 55,171 107,848
Other assets 3,321,270 2,967,534 2,904,274
------------ ------------ ------------
Total assets $106,244,822 $104,740,644 $103,726,385
============ ============ ============
Liabilities and Shareholders' Equity
Noninterest-bearing consumer and commercial deposits $ 15,112,654 $ 16,369,823 $ 13,532,170
Interest-bearing consumer and commercial deposits 50,507,691 45,911,419 42,502,291
------------ ------------ ------------
Total consumer and commercial deposits 65,620,345 62,281,242 56,034,461
Brokered deposits 2,394,722 2,829,687 1,780,828
Foreign deposits 1,491,740 2,425,493 4,907,375
------------ ------------ ------------
Total deposits 69,506,807 67,536,422 62,722,664
Funds purchased 10,254,209 10,104,287 13,546,629
Other short-term borrowings 1,101,870 1,651,639 2,493,686
Long-term debt 10,560,021 11,010,580 11,475,889
Guaranteed preferred beneficial interests in debentures 1,650,000 1,650,000 1,050,000
Acceptances outstanding 17,248 55,171 107,848
Other liabilities 4,577,378 4,372,977 4,499,269
------------ ------------ ------------
Total liabilities 97,667,533 96,381,076 95,895,985
------------ ------------ ------------
Preferred stock, no par value; 50,000,000 shares authorized; none issued -- -- --
Common stock, $1.00 par value 294,163 294,163 323,163
Additional paid in capital 1,276,559 1,259,609 1,270,670
Retained earnings 5,661,825 5,479,951 6,531,995
Treasury stock and other (414,518) (329,408) (1,903,872)
------------ ------------ ------------
Realized shareholders' equity 6,818,029 6,704,315 6,221,956
Accumulated other comprehensive income 1,759,260 1,655,253 1,608,444
------------ ------------ ------------
Total shareholders' equity 8,577,289 8,359,568 7,830,400
------------ ------------ ------------
Total liabilities and shareholders' equity $106,244,822 $104,740,644 $103,726,385
============ ============ ============
Common shares outstanding 286,207,564 288,601,607 291,808,231
Common shares authorized 750,000,000 750,000,000 750,000,000
Treasury shares of common stock 7,955,193 5,561,150 31,354,526
(1) Includes net unrealized gains on securities available for sale $ 2,764,849 $ 2,632,266 $ 2,509,185
See notes to consolidated financial statements
4
Consolidated Statements of Cash Flows
-------------------------------------
Three Months
Ended March 31
-------------------------
(Dollars in thousands) (Unaudited) 2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 304,881 $ 337,525
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion 78,717 77,226
Provisions for loan losses and foreclosed property 163,727 67,419
Amortization of compensation element of restricted stock 1,741 1,050
Securities gains (63,450) (57,117)
Net gain on sale of assets (742) (3,124)
Originated loans held for sale (5,259,847) (3,873,540)
Sales of loans held for sale 6,138,832 3,095,339
Net increase in accrued interest receivable,
prepaid expenses and other assets (845,044) (765,758)
Net increase in accrued interest payable,
accrued expenses and other liabilities 123,386 603,754
----------- -----------
Net cash provided by (used in) operating activities 642,201 (517,226)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 1,172,018 523,480
Proceeds from sales of securities available for sale 2,557,512 1,168,211
Purchases of securities available for sale (4,073,440) (1,739,622)
Net decrease (increase) in loans 655,745 (147,545)
Proceeds from sale of loans 39,542 69,400
Capital expenditures (4,455) (8,399)
Proceeds from the sale of other assets 6,297 7,238
Loan recoveries 17,523 13,027
Net cash proceeds in acquisition of Huntington 1,160,333 --
----------- -----------
Net cash provided by (used in) investing activities 1,531,075 (114,210)
----------- -----------
Cash flows from financing activities:
Net decrease in consumer and commercial deposits (1,152,948) (601,866)
Net decrease in foreign and brokered deposits (1,368,718) (6,208,807)
Net (decrease) increase in funds purchased
and other short-term borrowings (546,563) 3,382,386
Proceeds from the issuance of long-term debt 250,695 4,100,000
Repayment of long-term debt (702,223) (519,541)
Proceeds from the exercise of stock options 3,291 1,710
Proceeds from stock issuance 14,243 7,938
Proceeds used in the acquisition of treasury stock (86,711) (305,127)
Restricted stock activity (724) --
Dividends paid (123,007) (117,574)
----------- -----------
Net cash used in financing activities (3,712,665) (260,881)
----------- -----------
Net decrease in cash and cash equivalents (1,539,389) (892,317)
Cash and cash equivalents at beginning of year 5,910,044 5,391,352
----------- -----------
Cash and cash equivalents at end of period $ 4,370,655 $ 4,499,035
=========== ===========
Supplemental Disclosure
Interest paid $ 504,767 $ 939,340
Income taxes (paid) refunded (29,766) 41,562
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, 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, January 1, 2002 $294,163 $1,259,609 $5,479,951 $ (329,408) $1,655,253 $8,359,568
Net income -- -- 304,881 -- -- 304,881
Other comprehensive income:
Change in unrealized gains (losses) on
derivatives, net of taxes -- -- -- -- 17,828 17,828
Change in unrealized gains (losses) on
securities, net of taxes -- -- -- -- 86,179 86,179
----------
Total comprehensive income 408,888
Cash dividends declared, $0.43 per share -- -- (123,007) -- -- (123,007)
Exercise of stock options -- (3,101) -- 6,392 -- 3,291
Acquisition of treasury stock -- -- -- (86,711) -- (86,711)
Restricted stock activity -- (2,231) -- 1,507 -- (724)
Amortization of compensation element
of restricted stock -- 20,224 -- (18,483) -- 1,741
Issuance of stock for employee benefit plans -- 2,058 -- 12,185 -- 14,243
-----------------------------------------------------------------------------
Balance, March 31, 2002 $294,163 $1,276,559 $5,661,825 $ (414,518) $1,759,260 $8,577,289
=============================================================================
* Balance at March 31, 2001 includes $1,862,702 for treasury stock and
$41,170 for compensation element of restricted stock.
Balance at March 31, 2002 includes $378,742 for treasury stock and $35,776
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/A for the year ended December
31, 2001. There have been no significant changes to the Company's Accounting
Policies as disclosed in the Annual Report on Form 10-K/A for the year ended
December 31, 2001.
Note 2 - Acquisitions
The Company completed the acquisition of the Florida banking franchise of
Huntington Bancshares, Inc. ("Huntington") on February 15, 2002. This
acquisition enhances the Company's position in the high growth markets of
eastern and western Florida and solidifies its presence as a leading financial
services provider in the state of Florida.
The consolidated statement of income includes the results of operations for
Huntington from the February 15, 2002 acquisition date. The transaction resulted
in $524 million of goodwill, $255 million of core deposit intangibles and $13
million of other intangibles, all of which are deductible for tax purposes. The
amount allocated to the core deposit intangible was determined by an independent
valuation and is being amortized over the estimated useful life of seven years
using the sum-of-years-digits method. The amount allocated to other intangibles
represents the identifiable intangible asset for trust and brokerage customer
lists. This intangible asset is being amortized over the estimated useful life
of seven years using the straight-line method.
The following condensed balance sheet discloses the amounts assigned to
each major asset and liability caption at the acquisition date, net of amounts
sold to FloridaFirst Bancorp, Inc.:
(Dollars in thousands) (Unaudited)
Assets
Cash and due from banks $1,160,333
Loans 2,684,384
Allowance for loan losses (15,531)
----------
Net loans 2,668,853
Goodwill 523,694
Intangible assets 267,559
Other assets 73,927
----------
Total assets $4,694,366
==========
Liabilities
Total deposits $4,495,210
Short term borrowings 146,716
Other liabilities 52,440
----------
Total liabilities $4,694,366
==========
7
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
The following condensed income statement discloses the pro forma results of
the Company as though the Huntington acquisition had occurred at the beginning
of the respective periods:
(In thousands) (Unaudited)
Three Months Ended March 31, 2002
---------------------------------------------------------------
SunTrust Pro Forma Pro Forma
Banks, Inc. /1/ Huntington /2/ Adjustments /3/ Combined
--------------- -------------- --------------- ----------
Interest and dividend income $1,297,589 $27,369 $ (1,731) $1,323,227
Interest expense 499,483 15,002 (6,317) 508,168
---------- ------- -------- ----------
Net interest income 798,106 12,367 4,586 815,059
Provision for loan losses 163,575 1,723 -- 165,298
---------- ------- -------- ----------
Net interest income after
provision for loan losses 634,531 10,644 4,586 649,761
Noninterest income 615,282 5,522 -- 620,804
Noninterest expense 837,628 14,714 10,924 863,266
---------- ------- -------- ----------
Income before provision for income taxes 412,185 1,452 (6,338) 407,299
Provision for income taxes 107,304 465 (2,218) 105,551
---------- ------- -------- ----------
Net income $ 304,881 $ 987 $ (4,120) $ 301,748
========== ======= ======== ==========
Net income per average common share:
Diluted $ 1.06 $ 1.05
Basic 1.07 1.06
Three Months Ended March 31, 2001
---------------------------------------------------------------
SunTrust Pro Forma Pro Forma
Banks, Inc. /4/ Huntington /5/ Adjustments /6/ Combined
--------------- -------------- --------------- ----------
Interest and dividend income $1,743,874 $71,393 $ (2,597) $1,812,670
Interest expense 939,017 46,303 (9,476) 975,844
---------- ------- -------- ----------
Net interest income 804,857 25,090 6,879 836,826
Provision for loan losses 67,300 3,728 -- 71,028
---------- ------- -------- ----------
Net interest income after
provision for loan losses 737,557 21,362 6,879 765,798
Noninterest income 525,919 11,591 -- 537,510
Noninterest expense 742,697 26,802 32,384 801,883
---------- ------- -------- ----------
Income before provision for income taxes 520,779 6,151 (25,505) 501,425
Provision for income taxes 183,254 1,968 (8,927) 176,295
---------- ------- -------- ----------
Net income $ 337,525 $ 4,183 $(16,578) $ 325,130
========== ======= ======== ==========
Net income per average common share:
Diluted $ 1.14 $ 1.10
Basic 1.16 1.11
/1/ The reported results of SunTrust Banks, Inc. for the three months ended
March 31, 2002 include the results of the acquired Florida franchise of
Huntington from the February 15, 2002 acquisition date. Also included is a
one-time provision for loan losses of $45.3 million related to Huntington.
/2/ The estimated results of the acquired Florida franchise of Huntington from
January 1, 2002 through February 14, 2002.
/3/ Pro Forma adjustments include the following items: amortization of core
deposit and other intangibles of $10.9 million, amortization of loan
purchase accounting adjustment of $1.7 million, and accretion of time
deposit purchase accounting adjustment of $6.3 million.
/4/ The reported results of SunTrust Banks, Inc. for the three months ended
March 31, 2001.
/5/ The estimated results of the acquired Florida franchise of Huntington for
the three months ended March 31, 2001.
/6/ Pro Forma adjustments include the following items: merger related expenses
of $16.0 million, amortization of core deposit and other intangibles of
$16.4 million, amortization of loan purchase accounting adjustment of $2.6
million, and accretion of time deposit purchase accounting adjustment of
$9.5 million.
8
Notes to Consolidated Financial Statements (Unaudited) - continued
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Note 3 - Recent Accounting Developments
In June of 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 establishes accounting and reporting standards
for business combinations. This Statement eliminates the use of the
pooling-of-interest method of accounting for business combinations, requiring
future business combinations to be accounted for using the purchase method of
accounting. Additionally, SFAS No. 141 enhances the disclosures related to
business combinations, which are included in this report, and requires that all
intangible assets acquired in a business combination be reported separately from
goodwill. These intangible assets must then be assigned to a specifically
identified reporting unit and assigned a useful life. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001. This
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or later.
SFAS No. 142 establishes accounting and reporting standards for
goodwill and other intangible assets. With the adoption of this Statement,
goodwill is no longer subject to amortization over its estimated useful life.
Year-to-date March 31, 2001 earnings included net-of-tax amortization of
goodwill totaling $6.9 million. Goodwill will be subject to, at least, an annual
assessment for impairment by applying a two step fair-value based test.
Additionally, SFAS No. 142 enhances the disclosures related to goodwill and
intangible assets, which are included in this report. SunTrust adopted SFAS No.
142 effective January 1, 2002. Goodwill currently carried on the balance sheet
was subject to an initial assessment for impairment. The Company has completed
its initial assessment review and determined that there is no impairment of
goodwill as of January 1, 2002. The adoption of this Statement did not have a
material impact on the Company's financial position or results of operations
with the exception of no longer amortizing goodwill.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies." SFAS No. 143
applies to all entities and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Because all asset retirement obligations that
fall within the scope of this Statement and their related asset retirement cost
will be accounted for consistently, financial statements of different entities
will be more comparable. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002; however, earlier
application is encouraged. The Company will adopt SFAS No. 143 on January 1,
2003. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued during the third quarter of 2001. SFAS No. 144 supercedes
both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which previously governed impairment of
long-lived assets, and ABP Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
which addressed the disposal of a business segment. This Statement improves
financial reporting by requiring one accounting model be used for long-lived
assets to be disposed of by sale and by broadening the presentation of
discontinued operations to include more disposal transactions. The Company
adopted SFAS No. 144 effective January 1, 2002 and it did not have a material
impact on the Company's financial position or results of operations.
Note 4 - Intangible Assets
Under the provisions of SFAS No. 142, goodwill was subjected to an initial
assessment for impairment. The Company completed its initial assessment review
and determined that there was no impairment of goodwill as of January 1, 2002.
The Company will review goodwill on an annual basis for impairment or as events
occur or circumstances change that would more likely than not reduce fair value
of a reporting unit below its carrying
9
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
amount. The changes in the carrying amount of goodwill by reportable segment for
the three months ended March 31, 2001 and 2002 are as follows:
Corporate
and Private
Investment Client
(Dollars in thousands) (Unaudited) Retail Commercial Banking Mortgage Services Corporate/Other Total
-------------------------------------------------------------------------------------
Balance, January 1, 2001 $337,283 $16,951 $118,180 $2,014 $ -- $-- $474,428
Amortization (5,589) (263) (1,342) (39) -- -- (7,233)
AMAHoldings, Inc. acquisition -- -- -- -- 22,172 -- 22,172
Contingent consideration -- 1,738 -- -- -- -- 1,738
-------------------------------------------------------------------------------------
Balance, March 31, 2001 $331,694 $18,426 $116,838 $1,975 $22,172 $-- $491,105
=====================================================================================
Balance, January 1, 2002 $299,984 $20,781 $ 93,442 $1,859 $24,431 $-- $440,497
Huntington acquisition 523,694 -- -- -- -- -- 523,694
Purchase price adjustment -- 3,078 1,071 -- -- -- 4,149
-------------------------------------------------------------------------------------
Balance, March 31, 2002 $823,678 $23,859 $ 94,513 $1,859 $24,431 $-- $968,340
=====================================================================================
The Company adopted SFAS No. 142, in its entirety, effective January 1, 2002.
The following presents the net income that would have been reported, exclusive
of goodwill amortization.
Three Months Ended
-------------------------------
(Dollars in thousands) (Unaudited) March 31, 2002 March 31, 2001
-------------- --------------
Reported net income $304,881 $337,525
Add: Goodwill amortization, net of taxes -- 6,909
-------- --------
Adjusted net income $304,881 $344,434
======== ========
Reported diluted earnings per share 1.06 1.14
Add: Goodwill amortization, net of taxes -- 0.02
-------- --------
Adjusted diluted earnings per share $ 1.06 $ 1.16
======== ========
Reported basic earnings per share 1.07 1.16
Add: Goodwill amortization, net of taxes -- 0.02
-------- --------
Adjusted basic earnings per share $ 1.07 $ 1.18
======== ========
10
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
The changes in the carrying amounts of other intangible assets for the three
months ended March 31, 2001 and 2002 are as follows:
Core Mortgage
Deposit Servicing
(Dollars in thousands) (Unaudited) Intangible Rights Other Total
--------------------------------------------
Balance, January 1, 2001 $ 20,878 $314,996 $ 558 $336,432
Amortization (1,024) (21,172) (33) (22,229)
Servicing rights acquired -- 19,273 -- 19,273
Servicing rights originated -- 43,960 -- 43,960
--------------------------------------------
Balance, March 31, 2001 $ 19,854 $357,057 $ 525 $377,436
============================================
Balance, January 1, 2002 $ 19,158 $351,200 $ 421 $370,779
Amortization (6,348) (40,816) (184) (47,348)
Servicing rights acquired -- 13,967 -- 13,967
Servicing rights originated -- 54,820 -- 54,820
Huntington acquisition 254,959 -- 12,600 267,559
--------------------------------------------
Balance, March 31, 2002 $267,769 $379,171 $12,837 $659,777
============================================
The estimated amortization expense for intangible assets, excluding amortization
of mortgage servicing rights, for 2002 and the subsequent five years is as
follows:
(Dollars in thousands)(Unaudited)
Core Deposit
Intangible Other Total
------------ ------- --------
2002 $ 57,261 $ 1,637 $ 58,898
2003 60,287 1,937 62,224
2004 50,432 1,920 52,352
2005 39,948 1,827 41,775
2006 30,618 1,800 32,418
2007 21,515 1,800 23,315
Thereafter 14,056 2,100 16,156
------------ ------- --------
Total $274,117 $13,021 $287,138
============ ======= ========
11
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
Note 5 - Comprehensive Income
Comprehensive income for the three months ended March 31, 2002 and 2001 is
calculated as follows:
(Dollars in thousands) (Unaudited)
2002 2001
-------- ---------
Unrealized gain (loss) on available for sale securities, net,
recognized in other comprehensive income:
Before income tax $132,583 $(480,245)
Income tax 46,404 (168,086)
-------- ---------
Net of income tax $ 86,179 $(312,159)
======== =========
Amounts reported in net income:
Gain on sale of securities $ 63,450 $ 57,117
Net amortization (accretion) 4,183 (4,426)
-------- ---------
Reclassification adjustment 67,633 52,691
Income tax (23,672) (18,442)
-------- ---------
Reclassification adjustment, net of tax $ 43,961 $ 34,249
======== =========
Unrealized gain (loss) on available for sale securities
arising during period, net of tax $130,140 $(277,910)
Reclassification adjustment, net of tax (43,961) (34,249)
-------- ---------
Net unrealized gain (loss) on available for sale securities
recognized in other comprehensive income $ 86,179 $(312,159)
======== =========
Unrealized gain (loss) on derivative financial instruments, net,
recognized in other comprehensive income:
Before income tax $ 27,428 $ (50,355)
Income tax (9,600) 17,624
-------- ---------
Net of income tax $ 17,828 $ (32,731)
======== =========
Cumulative effect of change in accounting principle $ -- $ (16,246)
Income tax -- 5,686
-------- ---------
Cumulative effect of change in accounting principle,
net of tax $ -- $ (10,560)
======== =========
Reclassification of losses from other comprehensive
income to earnings $ 1,934 $ 3,036
Income tax (677) (1,063)
-------- ---------
Reclassification adjustment, net of tax $ 1,257 $ 1,973
======== =========
Cumulative effect of change in accounting principle,
net of tax $ -- $ (10,560)
Unrealized gain (loss) on derivative financial instruments
arising during period, net of tax 16,571 (13,584)
Reclassification adjustment, net of tax 1,257 1,973
-------- ---------
Net unrealized gain (loss) on derivative instruments
recognized in other comprehensive income $ 17,828 $ (22,171)
======== =========
Total unrealized gains (losses) recognized in
other comprehensive income $104,007 $(334,330)
Net income 304,881 337,525
-------- ---------
Total comprehensive income $408,888 $ 3,195
======== =========
12
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 earnings per
share ("EPS"). Shares of 2.7 million and 3.7 million for the periods ended March
31, 2002 and 2001, 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, 2002 and 2001 is
included in the following table:
Three Months
(In thousands, except per share data) (Unaudited) Ended March 31
---------------------
2002 2001
-------- --------
Diluted
- --------
Net income $304,881 $337,525
-------- --------
Average common shares outstanding 284,055 291,805
Effect of dilutive securities:
Stock options 1,716 2,140
Performance restricted stock 1,604 1,887
-------- --------
Average diluted common shares 287,375 295,832
-------- --------
Earnings per common share - diluted:
Net income $ 1.06 $ 1.14
======== ========
Basic
- -----
Net income $304,881 $337,525
-------- --------
Average common shares 284,055 291,805
-------- --------
Earnings per common share - basic:
Net income $ 1.07 $ 1.16
======== ========
Note 7 - Business Segment Reporting
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 business segment performance
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 transfer priced funds charges and
credits 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.
13
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
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 that are
expected to be implemented throughout 2002. Once complete, the items 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.
The tables on page 15 disclose selected financial information for
SunTrust's new reportable business segments for the three months ended March 31,
2002 and 2001.
14
Notes to Consolidated Financial Statements (Unaudited) - continued
------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
Three Months Ended March 31, 2002
--------------------------------------------------------------------------------------------------
Corporate and Private
Investment Client
Retail Commercial Banking Mortgage Services Corporate/ Other Consolidated
--------------------------------------------------------------------------------------------------
Average total assets $21,543,677 $21,455,904 $20,537,334 $19,264,633 $1,720,382 $20,274,166 $104,796,096
Average total liabilities 49,659,018 9,094,931 5,038,803 1,186,206 1,538,591 29,892,693 96,410,242
Average total equity -- -- -- -- -- 8,385,854 8,385,854
--------------------------------------------------------------------------------------------------
Net interest income (FTE)/1/ 404,914 150,877 70,637 94,026 12,310 74,887 807,651
Provision for loan losses/2/ 23,519 10,989 54,013 1,722 646 72,686 163,575
--------------------------------------------------------------------------------------------------
Net interest revenue 381,395 139,888 16,624 92,304 11,664 2,201 644,076
Noninterest revenue 172,057 75,882 122,502 32,139 161,032 51,670 615,282
Noninterest expense 329,129 101,878 100,858 86,723 119,514 99,526 837,628
--------------------------------------------------------------------------------------------------
Total income before taxes 224,323 113,892 38,268 37,720 53,182 (45,655) 421,730
Provision for income taxes/3/ -- -- -- -- -- 116,849 116,849
--------------------------------------------------------------------------------------------------
Net income $ 224,323 $ 113,892 $ 38,268 $ 37,720 $ 53,182 $ (162,504) $ 304,881
==================================================================================================
Three Months Ended March 31, 2001
--------------------------------------------------------------------------------------------------
Corporate and Private
Investment Client
Retail Commercial Banking Mortgage Services Corporate/ Other Consolidated
--------------------------------------------------------------------------------------------------
Average total assets $19,545,007 $20,126,478 $22,731,057 $19,410,215 $1,286,110 $20,126,499 $103,225,366
Average total liabilities 44,459,356 8,607,367 4,303,982 747,346 1,515,561 35,502,536 95,136,148
Average total equity -- -- -- -- -- 8,089,218 8,089,218
--------------------------------------------------------------------------------------------------
Net interest income (FTE)(1) 378,641 146,285 69,330 40,854 11,346 168,771 815,227
Provision for loan losses(2) 11,646 8,098 18,975 1,923 291 26,367 67,300
--------------------------------------------------------------------------------------------------
Net interest revenue 366,995 138,187 50,355 38,931 11,055 142,404 747,927
Noninterest revenue 150,039 56,916 90,375 53,662 150,889 24,038 525,919
Noninterest expense 286,533 95,087 85,455 72,135 100,433 103,054 742,697
--------------------------------------------------------------------------------------------------
Total income before taxes 230,501 100,016 55,275 20,458 61,511 63,388 531,149
Provision for income taxes(3) -- -- -- -- -- 193,624 193,624
--------------------------------------------------------------------------------------------------
Net income $ 230,501 $ 100,016 $ 55,275 $ 20,458 $ 61,511 $ (130,236) $ 337,525
==================================================================================================
/1/ Net interest income is fully taxable equivalent and is presented on a
matched maturity funds transfer price basis.
/2/ Provision for loan losses includes a credit risk premium charge for the
lines of business.
/3/ Includes regular income tax provision and taxable-equivalent income
adjustment reversal of $9,545 and $10,370 for the three months ended March
31, 2002 and 2001, respectively.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
SunTrust Banks, Inc., one of the nation's largest commercial banking
organizations, 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, credit-related insurance, asset
management, securities brokerage and capital market services.
SunTrust has 1,196 full-service branches, including supermarket branches, and
continues to leverage technology to provide customers the convenience of banking
on the Internet, through 2,359 automated teller machines and via twenty-four
hour telebanking.
The following analysis of the financial performance of SunTrust for the first
quarter of 2002 should be read in conjunction with the financial statements,
notes and other information contained in this document. In Management's
Discussion, net interest income, net interest margin and the efficiency ratio
are presented on a fully taxable-equivalent (FTE) basis, which is adjusted for
the tax-favored status of income from certain loans and investments.
Additionally, the Company 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 $2.5 billion as of March 31,
2002, the Company believes that this measure is more indicative of its return on
average shareholders' equity when comparing performance to other companies.
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, 2002 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.
Effective January 1, 2002, in accordance with the provisions of SFAS No. 142,
SunTrust will no longer amortize goodwill. See "Recent Accounting Developments"
on page 9 of the Notes to the Consolidated Financial Statements for further
information.
In addition, the preparation of the financial statements, upon which
Management's Discussion is based, requires Management to make estimates which
impact these financial statements. The Company disclosed its Accounting Policies
on pages 48 through 51 of the Annual Report on Form 10-K/A for the year ended
December 31, 2001. There have been no significant changes to the Company's
Accounting Policies as disclosed in this report.
16
EARNINGS ANALYSIS
SunTrust reported earnings of $304.9 million for the first quarter of 2002, a
decrease of $32.6 million, or 9.7%, compared to $337.5 million in the same
period last year. In the first quarter of 2002, results included $39.8 million
after-tax in nonrecurring expenses associated with the Company's acquisition of
the Florida franchise of Huntington Bancshares, Inc. The following table
reconciles reported diluted earnings per share to operating diluted earnings per
share for the three months ended March 31, 2002 and 2001:
(Unaudited) Three Months
Ended March 31
--------------
2002 2001
----- -----
Reported diluted earnings per share $1.06 $1.14
Merger-related expenses 0.14 --
----- -----
Operating diluted earnings per share $1.20 $1.14
===== =====
Net interest income decreased $7.6 million, or 0.9%, from the first quarter of
2001 to the first quarter of 2002. This was due to lower loan related revenues
associated with the weak economy as average loans, adjusted for securitizations
and the impact of Huntington, were down 3% from the first quarter of 2001.
The provision for loan losses was $163.6 million for the first quarter of 2002,
an increase of $96.3 million, or 143.1%, over the same period last year. The
increase was due to $45.3 million of additional, one-time provision expenses
related to the Huntington acquisition and increased consumer and commercial
charge-offs due to the weakened economy.
Total noninterest income, excluding securities gains, was $551.8 million, an
increase of $83.0 million, or 17.7%, over the prior year's first quarter. The
increase is in part attributable to a $30.7 million, or 218.1%, growth in
investment banking income as the Company benefited from improvements in the
performance of its equity capital markets business and the addition of the
institutional business of Robinson-Humphrey. In addition, combined service
charges on deposit accounts and other charges and fees increased $40.8 million,
or 23.2%, due to increased usage of products and services, a more consistent
pricing strategy throughout its markets and a lower earnings credit rate. The
acquisition of Huntington contributed $5.5 million of noninterest income for the
first quarter of 2002, primarily in service charges on deposit accounts and
other charges and fees.
Total noninterest expense increased $94.9 million, or 12.8%, over the first
quarter of 2001 to $837.6 million. Personnel expenses increased $52.0 million,
or 12.0%, due to increased benefits costs and the acquisitions of Huntington,
the institutional business of Robinson-Humphrey and AMA Holdings, Inc. The
acquisition of Huntington resulted in $36.2 million of noninterest expense for
the first quarter of 2002 including approximately $16.0 million of one-time
merger-related charges for operations and systems integration. Also contributing
to the overall increase was a $9.8 million increase in One Bank expenses
compared to the first quarter of 2001. The One Bank initiative system
enhancements are expected to yield future operating efficiencies in customer
based systems across the Company's geographic footprint. It is anticipated that
the Company will complete these enhancements during the fourth quarter of 2002.
17
Selected Quarterly Financial Data Table 1
(Dollars in millions except per share data) (Unaudited) Quarters
--------------------------------------------------------------
2002 2001
---------- -------------------------------------------------
1 4 3 2 1
---------- ---------- ---------- ---------- ----------
Summary of Operations
Interest and dividend income $ 1,297.6 $ 1,391.1 $ 1,509.9 $ 1,634.7 $ 1,743.9
Interest expense 499.5 571.1 706.1 810.8 939.0
---------- ---------- ---------- ---------- ----------
Net interest income 798.1 820.0 803.8 823.9 804.9
Provision for loan losses 163.6 88.1 80.2 39.6 67.3
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 634.5 731.9 723.6 784.3 737.6
Noninterest income(1) 615.3 557.7 550.4 521.8 525.9
Noninterest expense(2)(3)(4) 837.6 830.2 776.8 763.8 742.7
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes and extraordinary items 412.2 459.4 497.2 542.3 520.8
Provision for income taxes 107.3 126.8 163.1 177.3 183.3
---------- ---------- ---------- ---------- ----------
Income before extraordinary items 304.9 332.6 334.1 365.0 337.5
Extraordinary gain (loss), net of taxes(5) -- 24.1 -- (17.8) --
---------- ---------- ---------- ---------- ----------
Net income $ 304.9 $ 356.7 $ 334.1 $ 347.2 $ 337.5
========== ========== ========== ========== ==========
Net interest income (taxable-equivalent) $ 807.7 $ 830.1 $ 813.9 $ 834.1 $ 815.2
Per Common Share
Diluted
Income before extraordinary items $ 1.06 $ 1.16 $ 1.15 $ 1.25 $ 1.14
Extraordinary gain (loss), net of taxes -- 0.08 -- (0.06) --
---------- ---------- ---------- ---------- ----------
Net income 1.06 1.24 1.15 1.19 1.14
Basic
Income before extraordinary items 1.07 1.17 1.17 1.27 1.16
Extraordinary gain (loss), net of taxes -- 0.08 -- (0.06) --
---------- ---------- ---------- ---------- ----------
Net income 1.07 1.25 1.17 1.21 1.16
Dividends declared 0.43 0.40 0.40 0.40 0.40
Book value 29.97 28.97 28.40 27.29 26.83
Market price
High 68.47 67.93 72.35 66.38 68.07
Low 58.32 58.10 60.10 59.25 57.29
Close 66.73 62.70 66.60 64.78 64.80
Selected Average Balances
Total assets $104,796.1 $103,882.0 $101,246.0 $103,194.2 $103,225.4
Earning assets 93,198.1 92,440.9 90,588.0 92,570.8 92,553.9
Loans 69,694.6 69,547.1 69,024.0 69,900.5 71,654.4
Consumer and commercial deposits 62,211.5 59,085.8 57,081.1 56,343.6 54,538.6
Brokered and foreign deposits 5,432.4 6,268.1 6,086.6 8,017.1 10,870.0
Realized shareholders' equity 6,729.8 6,530.6 6,305.4 6,208.8 6,264.6
Total shareholders' equity 8,385.9 8,334.5 7,996.1 7,873.4 8,089.2
Common shares - diluted (thousands) 287,375 289,319 289,601 291,677 295,832
Common shares - basic (thousands) 284,055 285,645 285,570 287,878 291,805
Financial Ratios (Annualized)
Return on average assets 1.21% 1.40% 1.34% 1.38% 1.36%
Return on average realized shareholders' equity 18.37 21.67 21.02 22.43 21.85
Return on average total shareholders' equity 14.74 16.98 16.58 17.68 16.92
Net interest margin 3.51 3.56 3.56 3.61 3.57
(1) Includes securities gains of $63.5 million for the first quarter of 2002
and $32.1, $36.2, $27.7 and $4.2 million for the fourth, third, second and
first quarters of 2001, respectively, related to the Company's securities
portfolio repositioning. An additional $52.9 million security gain was
recorded in the first quarter of 2001 on the sale of Star Systems, Inc.
(2) Includes enhancements to customer based systems of $16.8 million for the
first quarter of 2002 and $15.5, $17.5, $14.7 and $7.0 million for the
fourth, third, second and first quarters of 2001, respectively, related to
the One Bank initiative.
(3) Includes merger-related expenses of $16.0 million for the first quarter of
2002 related to the acquisition of the Florida franchise of Huntington
Bancshares.
(4) Includes Wachovia proposal expenses of $32.0 million for the third quarter
of 2001.
(5) Represents the gain on the Company's early extinguishment of long-term debt
during the fourth quarter of 2001, net of $13.0 million in taxes, and the
loss of the Company's early extinguishment of long-term debt during the
second quarter of 2001, net of $9.6 million in taxes.
18
Consolidated Daily Average Balances, Income/Expense
and Average Yields Earned and Rates Paid
(Dollars in millions; yields on taxable-equivalent basis) (Unaudited)
Quarter Ended
-----------------------------------------------------------------
March 31, 2002 December 31, 2001
------------------------------- -------------------------------
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
---------- -------- ------- ---------- -------- -------
Assets
Loans:(1)
Taxable $ 68,473.6 $ 980.4 5.81% $ 68,348.8 $1,057.0 6.14%
Tax-exempt(2) 1,221.0 17.6 5.85 1,198.3 18.6 6.16
------------------------------- -------------------------------
Total loans 69,694.6 998.0 5.81 69,547.1 1,075.6 6.14
Securities available for sale:
Taxable 15,943.1 221.1 5.55 15,798.9 236.8 6.00
Tax-exempt(2) 424.4 7.4 6.95 441.7 7.8 7.05
------------------------------- -------------------------------
Total securities available for sale 16,367.5 228.5 5.58 16,240.6 244.6 6.02
Funds sold 1,175.7 5.3 1.79 1,193.8 7.3 2.38
Loans held for sale 4,084.4 67.6 6.62 3,777.0 65.5 6.94
Interest-bearing deposits 328.6 1.5 1.86 233.5 1.2 2.17
Trading account 1,547.3 6.3 1.65 1,448.9 7.0 1.91
------------------------------- -------------------------------
Total earning assets 93,198.1 1,307.2 5.69 92,440.9 1,401.2 6.01
Allowance for loan losses (897.3) (867.0)
Cash and due from banks 3,360.2 3,521.6
Premises and equipment 1,613.1 1,586.4
Other assets 4,931.3 4,430.0
Unrealized gains on securities
available for sale 2,590.7 2,770.1
------------------------------- -------------------------------
Total assets $104,796.1 $103,882.0
=============================== ===============================
Liabilities and Shareholders' Equity
Interest-bearing deposits:
NOW/money market $ 9,620.0 $ 18.1 0.76% $ 8,921.1 $ 20.2 0.90%
Money Market - regular 19,191.0 83.8 1.77 18,004.0 101.6 2.24
Savings 6,271.9 23.7 1.54 5,989.3 28.4 1.88
Consumer time 9,040.8 92.0 4.13 8,556.8 97.6 4.53
Other time 3,491.6 30.8 3.57 3,457.0 38.5 4.42
------------------------------- -------------------------------
Total interest bearing consumer
and commercial deposits 47,615.3 248.4 2.12 44,928.2 286.3 2.53
Brokered deposits 2,646.9 40.8 6.16 2,910.8 21.3 2.86
Foreign deposits 2,785.5 11.8 1.70 3,357.3 18.3 2.13
------------------------------- -------------------------------
Total interest-bearing deposits 53,047.7 301.0 2.30 51,196.3 325.9 2.53
Funds purchased 10,241.5 35.5 1.39 10,339.0 47.1 1.78
Other short-term borrowings 1,265.5 4.8 1.54 1,582.2 8.8 2.19
Long-term debt 12,273.0 158.2 5.23 12,870.5 189.3 5.84
------------------------------- -------------------------------
Total interest-bearing liabilities 76,827.7 499.5 2.64 75,988.0 571.1 2.98
Noninterest-bearing deposits 14,596.1 14,157.6
Other liabilities 4,986.4 5,401.9
Realized shareholders' equity 6,729.8 6,530.6
Accumulated other comprehensive income 1,656.1 1,803.9
------------------------------- -------------------------------
Total liabilities and shareholders' equity $104,796.1 $103,882.0
=============================== ===============================
Interest rate spread 3.05% 3.03%
------------------------------- -------------------------------
Net Interest Income $ 807.7 $ 830.1
------------------------------- -------------------------------
Net Interest Margin(3) 3.51% 3.56%
------------------------------- -------------------------------
(1) Interest income includes loan fees of $29.4, $40.2, $36.9, $35.6 and $36.0
million in the quarters ended March 31, 2002 and December 31, September 30,
June 30, and March 31, 2001, 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 $9.5, $10.1, $10.1, $10.2 and $10.4 million in the quarters
ended March 31, 2002 and December 31, September 30, June 30, and March 31,
2001, respectively.
19
Table 2
Quarter Ended
- ---------------------------------------------------------------------------------------------------
September 30, 2001 June 30, 2001 March 31, 2001
- ------------------------------- ------------------------------- -------------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates Balances Expense Rates
- ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
$ 67,894.6 $1,162.1 6.79% $ 68,810.9 $1,258.7 7.34% $ 70,552.3 $1,385.0 7.96%
1,129.4 19.1 6.71 1,089.6 19.8 7.28 1,102.1 20.9 7.68
- ------------------------------- ------------------------------- -------------------------------
69,024.0 1,181.2 6.79 69,900.5 1,278.5 7.34 71,654.4 1,405.9 7.96
15,152.8 248.9 6.57 16,756.8 278.2 6.64 15,920.2 270.0 6.78
447.8 9.1 8.17 455.9 9.4 8.24 449.6 9.4 8.32
- ------------------------------- ------------------------------- -------------------------------
15,600.6 258.0 6.62 17,212.7 287.6 6.68 16,369.8 279.4 6.83
1,271.6 11.6 3.57 1,176.4 13.4 4.50 1,361.1 18.9 5.56
3,182.5 57.5 7.22 2,829.8 51.9 7.34 1,988.3 36.5 7.35
323.6 3.3 3.99 83.1 0.7 3.72 26.0 0.4 6.79
1,185.7 8.4 2.83 1,368.3 12.8 3.75 1,154.3 13.2 4.61
- ------------------------------- ------------------------------- -------------------------------
90,588.0 1,520.0 6.66 92,570.8 1,644.9 7.13 92,553.9 1,754.3 7.69
(872.8) (868.9) (896.7)
3,315.2 3,373.7 3,321.7
1,594.2 1,601.4 1,617.1
4,019.0 3,955.5 3,761.5
2,602.4 2,561.7 2,867.9
- ------------------------------- ------------------------------- -------------------------------
$101,246.0 $103,194.2 $103,225.4
=============================== =============================== ===============================
$ 8,328.6 $ 23.9 1.14% $ 8,410.0 $ 26.9 1.28% $ 8,219.2 $ 30.2 1.49%
16,925.5 136.6 3.20 15,369.9 146.2 3.81 12,953.7 143.3 4.48
6,004.6 40.1 2.65 6,024.8 46.4 3.09 6,251.4 56.6 3.67
8,870.2 112.1 5.01 9,217.8 123.3 5.37 9,741.0 135.7 5.65
3,783.0 47.2 4.95 3,829.4 52.7 5.52 4,235.1 62.1 5.95
- ------------------------------- ------------------------------- -------------------------------
43,911.9 359.9 3.25 42,851.9 395.5 3.70 41,400.4 427.9 4.19
2,797.6 28.0 3.92 2,265.6 26.8 4.68 2,490.3 39.2 6.30
3,289.0 29.4 3.50 5,751.5 62.6 4.31 8,379.7 117.2 5.59
- ------------------------------- ------------------------------- -------------------------------
49,998.5 417.3 3.31 50,869.0 484.9 3.82 52,270.4 584.3 4.53
10,616.7 84.8 3.13 12,367.6 125.9 4.03 11,834.6 154.4 5.22
1,702.1 14.6 3.40 1,367.1 16.0 4.68 1,724.3 24.1 5.66
12,926.0 189.4 5.81 12,486.2 184.0 5.91 11,688.5 176.3 6.12
- ------------------------------- ------------------------------- -------------------------------
75,243.3 706.1 3.72 77,089.9 810.8 4.22 77,517.8 939.1 4.91
13,169.2 13,491.7 13,138.2
4,837.3 4,739.2 4,480.1
6,305.4 6,208.8 6,264.6
1,690.7 1,664.6 1,824.7
- ------------------------------- ------------------------------- -------------------------------
$101,246.0 $103,194.2 $103,225.4
=============================== =============================== ===============================
2.94% 2.91% 2.78%
- ------------------------------- ------------------------------- -------------------------------
$ 813.9 $ 834.1 $ 815.2
- ------------------------------- ------------------------------- -------------------------------
3.56% 3.61% 3.57%
- ------------------------------- ------------------------------- -------------------------------
(3) Derivative instruments used to help balance SunTrust's interest-sensitivity
position increased net interest income $25.2, $16.8, $17.3, $4.5 million,
and decreased net interest income $1.1 million in the quarters ended March
31, 2002 and December 31, September 30, June 30, and March 31, 2001,
respectively. Without these swaps, the net interest margin would have been
3.40%, 3.49%, 3.49%, 3.59% and 3.58% in the quarters ended March 31, 2002
and December 31, September 30, June 30, and March 31, 2001, respectively.
20
Business Segments. Prior to 2001, the Company's segment disclosures were 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
The Retail line of business includes loans, deposits, and other fee based
services for consumer and private banking clients, as well as business clients
with less than $5 million in sales. Retail serves clients through an extensive
network of traditional and in-store branches, ATMs, and SunTrust Online (STOLI),
the telephone and Internet banking channel. In addition to serving the retail
market, the Retail line of business serves as a "port of entry" for new
customers who are referred to other lines of business. When client needs change
and expand, Retail promotes existing clients into the Private Client Services
and Commercial lines of business.
Commercial
The Commercial line of business provides enterprises with a full array of
financial solutions including traditional commercial lending, treasury
management, financial risk management products and merchant card services. The
primary customer segments served by this line of business include "Commercial"
($5 million to $50 million in annual revenues), "Middle Market" ($50 million to
$250 million in annual revenues), "Commercial Real Estate" (entities that
specialize in Commercial Real Estate activities), "Financial Institutions"
(correspondent banking entities), and "Government/Not-for-Profit" entities. Also
included in this segment are specialty groups that operate both within and
outside of the SunTrust footprint such as Receivables Capital Management
(factoring services), Affordable Housing (tax credits related to community
development), and Premium Assignment Corporation (insurance premium financing).
Corporate and Investment Banking
Corporate & Investment Banking ("CIB") serves firms with over $250 million in
annual revenues in a variety of industries both inside and outside the SunTrust
footprint. Industry Specialties include Media & Communications, Energy,
Healthcare, Franchise & Distributor Finance, Restaurants, Agrifoods, Fabrics &
Furnishings, Business Services, Financial Institutions, Retail & Consumer, and
Technology.
Corporate & Investment Banking is comprised of the following units: Corporate
Banking, Treasury Management, International Banking, SunTrust Leasing, SunTrust
Robinson Humphrey Debt Capital Markets, SunTrust Robinson Humphrey Equity
Capital Markets, and SunTrust Equity Partners. These units offer commercial
lending and treasury management services, as well as numerous products and
services outside of the traditional commercial lending environment.
Mortgage
The Mortgage line of business originates first mortgage loans through retail,
broker and correspondent channels. These loans are securitized and sold in the
secondary market with servicing rights retained or held in the Company's
residential loan portfolio. The line of business services loans for its own
residential mortgage portfolio as well as for others.
21
Private Client Services
Private Client Services ("PCS") provides a full array of asset management
products and professional services to both individual and institutional clients.
PCS' primary segments include brokerage, individual wealth management, and
institutional investment management and administration. Individual clients
seeking brokerage services may choose between PCS' discount/online, mid-tier, or
full service brokerage offerings. PCS also offers professional investment
management and trust services to clients seeking active management of their
financial resources. Institutional investment management and administration is
comprised of Trusco Capital Management, Inc. ("Trusco"), Retirement Services,
Endowment & Foundation Services, Corporate Trust, and Stock Transfer. Retirement
Services provides administration and custody services for 401(k) and employee
defined benefit plans. Endowment & Foundation Services also provides
administration and custody services to non-profit organizations, including
government agencies, colleges and universities, community charities and
foundations, and hospitals. Corporate Trust targets issuers of tax-exempt and
corporate debt and asset-based securities, as well as corporations and attorneys
requiring escrow and custodial services. Trusco is a registered investment
advisor that acts as the investment manager for PCS' institutional clients and
the STI Classic Funds.
Corporate/Other
Corporate/Other ("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. The major components of the Other line of business include Enterprise
Information Services, which is the primary data processing and operations group,
the Corporate Real Estate group, which manages occupancy expense, Marketing,
which handles advertising, product management and customer information
functions, SunTrust Online, which handles customer phone inquiries and phone
sales and manages the internet banking function, Human Resources, which includes
the recruiting, training and employee benefit administration functions, Finance,
which includes accounting, budgeting, planning, audit, tax, treasury, risk
management and internal control. Other functions included in the Other line of
business are asset quality administration, loan review, legal and compliance,
corporate strategies development and the executive management group. The Other
line of business also contains certain expenses that have not been allocated to
the primary lines of business, eliminations, and the residual offsets derived
from matched-maturity funds transfer pricing and provision for loan
losses/credit risk premium allocations.
The following table for SunTrust's reportable business segments compares total
income before taxes for the three months ended March 31, 2002 to the same period
last year:
Table 3
(Dollars in thousands) (Unaudited) Three Months Ended
-------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
Lines of Business Total Income Before Taxes/1/
- -------------------------------- -------------------------------
Retail $224,323 $230,501
Commercial 113,892 100,016
Corporate and Investment Banking 38,268 55,275
Mortgage 37,720 20,458
Private Client Services 53,182 61,511
Corporate/Other (45,655) 63,388
-------- --------
Total Consolidated $421,730 $531,149
======== ========
/1/ Includes FTE adjustment of $9,545 and $10,370 for the three months ended
March 31, 2002 and March 31, 2001, respectively.
The following analysis details the operating results for each Line of Business
for the three months ended March 31, 2002 and 2001.
22
Retail
Retail's first quarter 2002 income before taxes was $224 million, a decrease of
3% when compared to the first quarter of 2001. Net income was expected to be
temporarily lower due to expenditures for the acquisition of Huntington. The
Huntington acquisition will bolster SunTrust's historically strong position in
the attractive Florida market. However, the acquisition necessitated extra
expenditures during the first quarter of 2002. The temporarily higher levels of
expense were necessary in order to execute a smooth transition on the February
15, 2002 merger date.
Commercial
Commercial's income before taxes increased $14 million, or 14%, in the first
quarter of 2002 compared to the first quarter of 2001. Factoring fees, which
represented $5.5 million in the first quarter of 2001, have been reclassified in
2002 into noninterest revenue from net interest income. Adjusting for the
reclassification of factoring fees, net interest income grew $10 million, or 7%,
in the first quarter of 2002 compared to the first quarter of 2001 while
noninterest revenue grew $13.5 million, or 22%. The net interest income increase
was driven by loan and deposit growth. The Huntington acquisition accounts for
$400 million, or 2%, of loan growth from 2001 to 2002 and $100 million, or 1%,
of deposit growth. Noninterest revenue growth was the result of increases in
deposit service charge income and fees for capital markets. The growth in
deposits and service charge income reflects the Company's commitment to raise
core deposits throughout 2001 and 2002. The significant increase in capital
markets fees is due to sales growth in financial risk management and M&A
products that meet the needs of middle market clients. Noninterest expense grew
$6.8 million, or 7%, from the first quarter of 2001 to support the increased
revenue growth of $20.7 million, or 10%.
Corporate and Investment Banking
CIB's income before taxes decreased $17 million, or 31%, in the first quarter of
2002 compared to the first quarter of 2001 primarily due to a $35 million, or
185%, increase in credit risk premium expense. Average assets declined $2.2
billion, or 10%, as a result of a conscious effort to exit marginally profitable
relationships, reduction in loan balances associated with the significant level
of public debt issuance in 2001, and the lack of loan demand related to the
current economic conditions. The increase in credit risk premium expense was
partially offset by noninterest revenue increasing $32 million, more than half
of which relates to SunTrust Robinson Humphrey Equity Capital Markets, as well
as strong growth in deposit account service charges, loan fees, letters of
credit fees, and various debt capital markets products. The increase in
noninterest expense is largely due to expenses associated with the institutional
business of Robinson-Humphrey, which was acquired during the third quarter of
2001.
Mortgage
The Mortgage line of business' income before taxes increased $17 million, or
84%, compared to the same quarter last year. This increase was driven by a 34%
improvement in total revenues due to higher levels of residential loan
origination performance. Residential loan production volume of $5.7 billion in
the first quarter of 2002 was up $1.2 billion, or 28%, from the first quarter of
2001. The $53 million increase in net interest revenue was principally driven by
income from wider spreads and a $2.1 billion increase in mortgage loans held for
sale. Noninterest revenue was down $22 million, principally due to higher
mortgage servicing rights amortization. Total noninterest expense in the first
quarter of 2002 was up $15 million, or 20%, over the same 2001 quarter
principally due to commission-based compensation that varies with loan
production.
23
Private Client Services
PCS' income before taxes decreased $8 million, or 14%, in the first quarter of
2002 compared to the same period in 2001. The decrease was due in part to a 19%
increase in expenses resulting from the April 2001 acquisition of Asset
Management Advisors, Inc. and the recent launch of its full service brokerage
capabilities, which are branded under the name Alexander Key. Partially
offsetting the increase in expenses was a 7% increase in noninterest income.
Trust and investment management income was up 4% in the first quarter of 2002
compared to the same period in 2001 and retail investment income was up 26% over
the same period. The growth in trust and investment management income was due to
the increase in assets under management from approximately $87 billion as of
March 31, 2001 to approximately $96 billion as of March 31, 2002. SunTrust's
total managed and non-managed trust assets were $135.3 billion, which excluded
$25.9 billion held in non-managed corporate trust accounts and $15.4 billion in
retail brokerage accounts. Assets under management increased despite the market
remaining flat as of the same periods due to strong net new business results.
Retail investment income grew due to an increase in broker production and the
number of brokers over the year ended March 31, 2002. PCS' total assets
increased 34% due primarily to loan growth.
Corporate/Other
The Other line of business' first quarter loss after taxes increased from ($130)
million in 2001 to ($163) million in 2002 primarily due to the balance sheet
repositioning and an increase in the provision for loan losses. Average total
liabilities declined by $5.6 billion, or 16%, from the first quarter of 2001
primarily as a result of consumer and commercial deposit growth from the rest of
the Company which eliminated the need for borrowings. Net interest income
declined as a result of the balance sheet repositioning and the residual offsets
derived from matched-maturity funds transfer pricing.
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 increase 0.5% under a gradual increase in interest rates of 100
basis points, versus the projection under stable rates. Net interest income
would decrease 0.4% under a gradual decrease in interest rates of 100 basis
points, versus the projection under stable rates. Management continued to
reposition the investment portfolio in the first quarter to gradually increase
the Company's asset sensitive position.
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. Net interest income for the first quarter of 2002
was $807.7 million, a decrease of .9% from the same period last year. The
decrease is primarily due to stagnant loan demand resulting from the
24
weaker economy. Adjusted for securitizations and the acquisition of Huntington,
average loans decreased 3% from the first quarter of 2001.
Average earning assets increased .7% and average interest-bearing liabilities
decreased .9% compared to the first quarter of 2001. The net interest margin in
the first quarter 2002 decreased six basis points to 3.51% compared to 3.57% in
the first quarter of 2001. The average rate on earning assets decreased 200
basis points to 5.69% and the average rate on interest-bearing liabilities
decreased 227 basis points to 2.64%. These decreases were primarily due to
decreasing interest rates throughout 2001.
SunTrust restructured its balance sheet throughout 2001 and into the first
quarter of 2002 to shift interest rate risk from a liability sensitive position
to a slightly asset sensitive position. The restructuring has been concentrated
in the investment and debt portfolios. The Company believes it is now well
positioned to benefit from rising interest rates which are forecasted to begin
rising in the later part of 2002.
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. During the
first quarter of 2001, the Company had a campaign to attract money market
accounts. Excluding the effects of Huntington, average money market accounts
have grown 44.5% on average compared to the first quarter of 2001.
Interest income that the Company was unable to recognize on nonperforming loans
had a negative impact of three basis points for the first three months of 2002
and 2001.
Noninterest Income. Noninterest income in the first quarter of 2002 increased
$89.4 million, or 17.0% from the comparable period last year. The increase
results in part from improvements in the equity and debt markets as the
Company's investment banking income increased $30.7 million, or 218.1%, to $44.8
million for the first quarter of 2002. The increase is also attributed to the
increased sales force through the acquisition of the institutional business of
Robinson-Humphrey in the third quarter of 2001. Service charges on deposits and
other charges and fees increased a combined $40.8 million, or 23.2% over the
first quarter of 2001. Increased usage of products and services, a more
consistent pricing strategy and a lower earnings credit rate resulted in the
increase in these income items. Included in credit card and other fees is debit
card interchange income of $16.9 million for the first quarter of 2002 compared
to $13.5 million in the same period of 2001. The increase in debit card income
is as a result of increased acceptance and utilization of this product by
customers. In the first quarter of 2002, the Company continued to reposition its
securities portfolio by shortening its average life. Securities gains of $63.5
million were recorded during the quarter as a result of this strategic
initiative. Mortgage servicing related income decreased $13.1 million, or
194.2%, due to accelerated amortization of mortgage servicing rights related to
increased prepayments.
Trust and investment management income increased 3.8% compared to the first
quarter of 2001. The increase in trust and investment management income is
consistent with the increase in assets under management which were approximately
$96 billion as of March 31, 2002. They include the STI Classic Funds,
institutional asset managed by Trustco Capital Management, individually managed
assets, and participant directed retirement accounts. SunTrust's total managed
and non-managed trust assets were $135.3 billion, which excluded $25.9 billion
held in non-managed corporate trust accounts and $15.4 billion in retail
brokerage accounts. Assets under management increased despite lower market
valuations due to strong net new business. Lost business was comparable with
prior year; however, new business was up significantly in the first quarter of
2002. Management expects these trends will continue in 2002 leading to improved
performance, provided the market environment improves. Retail investment income
increased 26.2% compared to the first quarter of 2001. The increase is primarily
due to an increase in broker production and the number of brokers. The Company
recently launched its full service brokerage division, Alexander Key, during the
first quarter of 2002, and as a result no revenue was recognized.
25
Noninterest Income Table 4
(In millions) (Unaudited)
Quarters
------------------------------------------
2002 2001
------ ---------------------------------
1 4 3 2 1
------ ------ ------ ------ ------
Service charges on deposit accounts $146.0 $135.5 $129.1 $125.6 $120.0
Trust and investment management income 129.1 117.2 119.8 124.8 124.3
Other charges and fees 70.4 65.9 61.3 57.5 55.6
Investment banking income 44.8 41.6 33.4 19.4 14.1
Trading account profits and commissions 25.7 11.0 30.0 24.9 29.7
Retail investment services 31.3 28.9 26.8 27.3 24.8
Credit card and other fees 31.2 29.4 28.7 30.0 25.6
Mortgage production related income 30.6 58.4 43.1 53.0 31.7
Mortgage servicing related income (6.3) (10.9) 0.8 (2.7) 6.7
Other income 49.0 48.6 41.2 34.3 36.3
Securities gains 63.5 32.1 36.2 27.7 57.1
------ ------ ------ ------ ------
Total noninterest income $615.3 $557.7 $550.4 $521.8 $525.9
====== ====== ====== ====== ======
Noninterest Expense. Noninterest expense increased $94.9 million, or 12.8% in
the first quarter of 2002 compared to the same period last year. Personnel
expenses, consisting of salaries, other compensation and employee benefits,
increased $52.0 million, or 12.0% from the earlier period. The increase resulted
from increased benefits costs and increased headcount through the acquisitions
of Huntington, the institutional business of Robinson-Humphrey, and AMA
Holdings, Inc. Specifically, employee benefits increased $34.1 million or 60.1%.
Contributing to this increase was increased 401(K) Plan expense due to plan
changes, increased medical insurance expense, and increased FICA expense.
Also contributing to the $94.9 million increase was a $9.8 million increase in
One Bank expenses. The One Bank initiative is for enhancements to customer based
systems across its geographic footprint and is expected to yield operating
efficiencies in the future.
The acquisition of Huntington resulted in an increase in noninterest expense of
$36.2 million. The $36.2 million includes $16.0 million of one-time
merger-related charges and $5.5 million for the amortization of intangible
assets. The $16.0 million of merger-related charges were primarily for
operations and systems integration costs.
The efficiency ratio increased to 58.9% in the first quarter of 2002 compared to
55.4% in the first quarter of 2001 due to the Company's increased noninterest
expenses.
The Company has recently instituted a series of cost-cutting initiatives to
address the increased growth in expenses. Included in these initiatives was a
temporary hiring freeze, travel restrictions and more stringent controls over
expense authorizations and approvals without impacting customer service. The
Company believes that these initiatives will help offset the slower than
anticipated revenue growth resulting from the weakened economy.
26
Noninterest Expense Table 5
(In millions) (Unaudited)
Quarters
------------------------------------------
2002 2001
------ ---------------------------------
1 4 3 2 1
------ ------ ------ ------ ------
Salaries $315.1 $301.3 $293.3 $285.8 $286.0
Other compensation 79.1 125.8 108.5 97.3 90.3
Employee benefits 90.8 42.4 45.5 48.4 56.7
------ ------ ------ ------ ------
Total personnel expense 485.0 469.5 447.3 431.5 433.0
Net occupancy expense 54.0 53.6 55.1 51.8 50.0
Outside processing and software 54.3 57.0 51.6 45.3 45.1
Equipment expense 43.7 51.0 49.9 44.3 44.5
Marketing and customer development 25.2 32.7 25.3 23.0 23.0
Consulting and legal 22.6 32.4 25.0 20.6 9.7
Credit and collection services 18.3 22.4 20.6 18.0 13.6
Communications 16.7 16.8 15.0 14.1 13.3
Postage and delivery 16.6 16.7 15.3 15.8 16.2
Merger-related expenses 16.0 -- -- -- --
Other staff expense 13.9 17.4 15.3 15.0 10.8
Operating supplies 12.4 13.3 12.3 11.4 11.3
Amortization of intangible assets 6.5 8.6 8.4 21.0 8.3
FDIC premiums 4.1 2.7 2.6 2.8 2.8
Other real estate (income) expense -- (0.4) 0.1 (3.1) (0.7)
Other expense 48.3 36.5 33.0 52.3 61.8
------ ------ ------ ------ ------
Total noninterest expense $837.6 $830.2 $776.8 $763.8 $742.7
====== ====== ====== ====== ======
Efficiency ratio 58.9% 57.1% 56.9% 56.3% 55.4%
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.
Provision for loan losses totaled $163.6 million in the first quarter of 2002,
an increase of $96.3 million, or 143.1% compared to the first quarter of 2001.
The increase in the provision was due to the acquisition of Huntington and a
substantial increase in net charge-offs. In order to bring the acquired
Huntington loan portfolio to SunTrust's credit quality standards, a one-time
provision for loan losses of $45.3 million was recorded in the first quarter of
2002. Additionally, net charge-offs in the first quarter of 2002 increased $52.3
million, or 78.9%, to $118.6 million compared to $66.3 million in the same
period last year. The increase in charge-offs was driven by credit deterioration
in line with the economic slowdown and includes charge-offs of $51 million
related to a large corporate energy company.
At March 31, 2002, SunTrust's allowance for loan losses totaled $927.6 million,
or 1.31% of quarter-end loans and 173.6% of total nonperforming loans. These
figures were $867.1 million, 1.26% and 155.4%, respectively at December 31,
2001. The increase in the allowance was primarily related to the acquisition of
Huntington-Florida in the first quarter of 2002.
27
Summary of Loan Loss Experience Table 6
(Dollars in millions) (Unaudited)
Quarters
---------------------------------------------------------
2002 2001
--------- ---------------------------------------------
1 4 3 2 1
--------- --------- --------- --------- ---------
Allowance for Loan Losses
Balances - beginning of quarter $ 867.1 $ 866.4 $ 866.1 $ 872.0 $ 874.5
Allowance from acquisitions and
other activity - net 15.5 -- -- (6.7) (3.5)
Provision for loan losses 163.6 88.1 80.2 39.6 67.3
Charge-offs:
Commercial (90.7) (64.9) (65.1) (30.5) (56.8)
Real estate:
Construction (0.2) (0.2) (0.1) 0.5 (0.6)
Residential mortgages (2.5) (2.7) (2.3) (3.6) (2.3)
Other (9.3) (5.0) (0.1) 0.2 (1.0)
Business credit card (0.4) (1.3) (0.5) (0.4) (0.5)
Consumer loans (33.0) (27.4) (23.9) (19.4) (18.2)
--------- --------- --------- --------- ---------
Total charge-offs (136.1) (101.5) (92.0) (53.2) (79.4)
========= ========= ========= ========= =========
Recoveries:
Commercial 7.9 7.0 4.5 7.8 4.6
Real estate:
Construction 0.2 (0.4) 0.6 0.1 0.2
Residential mortgages 0.6 0.6 0.6 0.5 0.5
Other 1.1 0.7 0.3 (0.6) 1.4
Business credit card 0.4 0.3 0.3 0.5 0.4
Consumer loans 7.3 5.9 5.8 6.1 6.0
--------- --------- --------- --------- ---------
Total recoveries 17.5 14.1 12.1 14.4 13.1
--------- --------- --------- --------- ---------
Net charge-offs (118.6) (87.4) (79.9) (38.8) (66.3)
--------- --------- --------- --------- ---------
Balance - end of quarter $ 927.6 $ 867.1 $ 866.4 $ 866.1 $ 872.0
========= ========= ========= ========= =========
Quarter-end loans outstanding $70,849.1 $68,959.2 $69,630.2 $68,938.2 $70,360.1
Average loans 69,694.6 69,547.1 69,024.0 69,900.5 71,654.4
Allowance to quarter-end loans 1.31% 1.26% 1.24% 1.26% 1.24%
Allowance to nonperforming loans 173.6 155.4 176.7 210.6 250.1
Net charge-offs to average loans
(annualized) 0.69 0.50 0.46 0.22 0.38
Recoveries to total charge-offs 12.9 13.9 13.2 27.1 16.5
28
Nonperforming Assets Table 7
(Dollars in millions) (Unaudited)
2002 2001
-------- -----------------------------------------------
March 31 December 31 September 30 June 30 March 31
-------- ----------- ------------ ------- --------
Nonperforming Assets
Nonaccrual loans:
Commercial $349.1 $377.6 $339.1 $292.9 $210.5
Real Estate:
Construction 3.9 4.0 4.7 2.3 2.1
Residential mortgages 82.4 79.9 64.9 56.6 83.3
Other 65.3 62.8 49.5 38.2 32.8
Consumer loans 33.5 33.8 32.0 21.1 20.0
------ ------ ------ ------ ------
Total nonperforming loans 534.2 558.1 490.2 411.1 348.7
Other real estate owned 18.5 20.7 18.9 20.3 20.6
------ ------ ------ ------ ------
Total nonperforming assets $552.7 $578.8 $509.1 $431.4 $369.3
====== ====== ====== ====== ======
Ratios:
Nonperforming loans to total loans 0.75% 0.81% 0.70% 0.60% 0.50%
Nonperforming assets to total loans
plus other real estate owned 0.78 0.84 0.73 0.63 0.52
Accruing Loans Past Due
90 Days or More $186.1 $185.5 $177.0 $211.8 $223.7
Nonperforming Assets. Nonperforming assets, which consist of nonaccrual loans
and other real estate owned, decreased $26.1 million, or 4.5%, from December 31,
2001 to March 31, 2002. The net reduction resulted primarily from charge-offs of
certain large corporate nonperforming loans during the quarter. The Company's
largest nonperforming loans at March 31, 2002 represent a diverse mix of
industries that have been impacted by the economic slowdown that began in 2001.
These industries include textiles, telecom, agribusiness, certain retail
operations, the energy-related industry and companies impacted by asbestos
litigation.
Interest income on nonaccrual loans, if recognized, is recorded using the cash
basis method of accounting. During the first quarter of 2002, this amounted to
$3.7 million. Interest income of $9.0 million would have been recorded if all
nonaccrual and restrutured loans had been accruing interest according to their
original contract terms.
29
Loan Portfolio by Types of Loans Table 8
(In millions) (Unaudited)
2002 2001
--------- --------------------------------------------------
March 31 December 31 September 30 June 30 March 31
--------- ----------- ------------ --------- ---------
Commercial $28,832.0 $28,945.9 $29,681.8 $29,156.1 $30,583.3
Real estate:
Construction 3,731.5 3,627.3 3,704.9 3,773.5 3,631.0
Residential mortgages 18,054.3 17,297.1 17,602.4 17,536.8 17,706.6
Other 8,600.2 8,152.0 7,898.5 7,761.4 7,693.9
Business credit card 99.5 92.0 85.2 86.2 82.6
Consumer loans 11,531.6 10,844.9 10,657.4 10,624.2 10,662.7
--------- --------- --------- --------- ---------
Total loans $70,849.1 $68,959.2 $69,630.2 $68,938.2 $70,360.1
========= ========= ========= ========= =========
Loans. Total loans at March 31, 2002 were $70.8 billion, an increase of $1.9
billion, or 2.7%, from December 31, 2001 due to the acquisition of Huntington.
Adjusting for the impact of Huntington, average loans decreased 1.7% from the
fourth quarter of 2001. Comparing period end March 31, 2002 to December 31, 2001
without adjustments, commercial loans were flat, consumer loans increased 6.3%
and real estate loans increased 4.5%. Included in the $18.1 billion in
residential mortgages at March 31, 2002 were $3.6 billion of home equity loans.
The increase in consumer and real estate loans is primarily due to the
acquisition of Huntington.
Income Taxes. The provision for income taxes was $107.3 million for the first
three months of 2002 compared to $183.3 million in the same period last year.
This represents a 26% and 35% effective tax rate for the first three months of
2002 and 2001, respectively.
Effective January 1, 2002, the Company elected to change the tax status of a
subsidiary to a real estate investment trust. As a result of this change, tax
laws required these assets be marked to market, recognizing gains and losses.
Recognition of these gains and losses resulted in the elimination of certain
previously recorded deferred taxes, which resulted in a reduction in the
effective tax rate for the first three months of 2002.
The Company expects the effective tax rate to return to historical levels for
the remainder of 2002.
Securities available for sale. The investment portfolio is managed as part of
the overall asset and liability management process to optimize income and market
performance over an entire interest rate cycle while mitigating risk. As
interest rates declined to their lowest level in forty years and are forecasted
to begin rising in the remainder of 2002, the Company shifted its interest rate
sensitivity position to being slightly asset sensitive to benefit from rising
rates. In conjunction with interest rate risk management, the Company continued
to reposition the portfolio during the first quarter of 2002 to shorten its
average life and shift its mix toward more floating rate assets. The average
life shortened from 4.8 to 3.5 years and the percentage of floating rate
securities increased to 20 % from 5% of the total portfolio as of March 31, 2002
and 2001, respectively. The portfolio yield decreased from 6.83% in the first
quarter of 2001 to 5.69% in the first quarter of 2002, primarily from purchasing
shorter term securities at lower market rates. Net securities gains of $63.5
million were realized in the first quarter of 2002 from selling longer term,
fixed rate securities as part of the repositioning.
The average portfolio size was flat on an amortized cost basis compared to the
fourth quarter of 2001. The carrying value of the investment portfolio, all of
which is classified as "securities available for sale," reflected $2.8 billion
in net unrealized gains at March 31, 2002, including a $2.5 billion unrealized
gain on the Company's investment in common stock of The Coca-Cola Company. The
market value of this common stock investment
30
increased $246.5 million while the net unrealized gain on the remainder of the
portfolio decreased $113.9 million compared to December 31, 2001. These changes
in market value did not affect the net income of SunTrust, but were included in
comprehensive income.
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 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 68%
of the funding base on average for the first quarter of 2002 compared to 66% in
the fourth quarter of 2001 and 60% in the first quarter of 2001. The increase is
attributable to strong customer-based core deposit growth aided by the
acquisition of Huntington, as average consumer and commercial deposits grew
14.1% on average compared to the first quarter of 2001. 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 $26.6
billion at March 31, 2002, compared with $28.2 billion at December 31, 2001 and
$34.3 billion at March 31, 2001. 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, issuances
of Trust Preferred securities, and commercial paper issuance by the Company.
Liquidity is also available through unpledged securities in the investment
portfolio and capacity to securitize loans, including single-family mortgage
loans.
As is common in the Financial Services Industry, SunTrust Bank assists in
providing liquidity to select corporate customers by directing them to a third
party owned commercial paper conduit. SunTrust's conduit relationship is with
Three Pillars Funding Corporation ("Three Pillars"). Three Pillars provides
financing for or direct purchases of financial assets originated and serviced by
SunTrust Bank's corporate customers. Three Pillars finances this activity by
issuing A-1/P-1 rated commercial paper. The result is a favorable funding
arrangement for these SunTrust Bank customers.
Three Pillars had assets and liabilities, not included in the Consolidated
Balance Sheet, of approximately $2.2 billion as of March 31, 2002, which
primarily consisted of secured loans, marketable asset-backed securities and
short-term commercial paper liabilities. Activities related to SunTrust Bank's
relationship with Three Pillars include: client referrals and investment
recommendations to Three Pillars; the issuing of a letter-of-credit, which
provides partial credit protection to commercial paper holders; and providing a
majority of the temporary liquidity arrangements that would provide funding to
Three Pillars in the event that it can no longer issue commercial paper. The
revenue generated from these activities was immaterial to SunTrust for the first
quarter of 2002 and 2001. SunTrust Bank has never had to fund under either the
liquidity arrangement or credit enhancement to Three Pillars.
Currently the FASB is reviewing the accounting rules pertaining to special
purpose entities, specifically the rules for consolidation. Additional
interpretations are expected to be issued in the later part of 2002. SunTrust
will analyze the exposure draft upon issuance and determine its effects, if any.
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
31
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.
Derivatives. Derivative financial instruments are components of the Company's
risk management profile. These instruments include interest rate swaps, options,
futures, forward contracts, credit default swaps and equity derivatives. 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 with others 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. On January 1, 2001, the Company
adopted SFAS No. 133. Accordingly, all derivatives are recorded in the financial
statements at fair value.
Certain derivatives are classified as trading assets and liabilities. Additional
trading income of $2.1 million and $2.9 million was recorded in the first
quarter of 2002 and 2001, respectively, 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 9
(Dollars in thousands) (Unaudited)
As of March 31, 2002
--------------------------------------------------------------------------------------------
Weighted Estimated Fair Value
Average Average ----------------------------------
Maturity In Received Average Unrealized Unrealized
Notional Balance Months Rate Pay Rate Gains Losses Net
--------------------------------------------------------------------------------------------
Mortgage Lending Commitments
Forward Contracts $ 5,080,781 1 --% --% $32,835 $ (200) $ 32,635
Interest Rate Lock Commitments 2,467,866 2 -- -- 762 (37,620) (36,858)
Option Contracts 90,000 1 4.92//(1)// -- -- - -
----------- ---------------------------------
Total Mortgage Related Derivatives 7,638,647 33,597 (37,820) (4,223)
Foreign Currency Forward Contracts 1,234,177 5 -- -- 18,098 (14,678) 3,420
Interest Rate Swaps (2) 4,227,393 56 3.01 4.63 41,630 (76,752) (35,122)
Other Derivatives 2,066,081 7 -- -- 1,593 (18,720) (17,127)
----------- ---------------------------------
Total Derivatives $15,166,298 $94,918 $(147,970) $(53,052)
=========== =================================
//(1)// Average option strike price.
(2) Includes $12.3 million of accrued interest expense.
Capital Ratios Table 10
(Dollars in millions) (Unaudited)
2002 2001
--------- --------------------------------------------------
March 31 December 31 September 30 June 30 March 31
--------- ----------- ------------ --------- ---------
Tier 1 capital $ 7,669.7 $ 7,994.2 $ 7,142.2 $ 6,906.6 $ 6,760.5
Total capital 11,950.8 12,144.2 11,311.9 10,652.0 10,507.1
Risk-weighted assets 99,165.2 100,651.8 98,759.6 97,005.9 98,690.0
Risk-based ratios:
Tier 1 capital 7.73% 8.02% 7.23% 7.12% 6.85%
Total capital 12.05 12.18 11.45 10.98 10.65
Tier 1 leverage ratio 7.60 7.94 7.28 6.90 6.77
Total shareholders' equity to assets 8.07 7.98 7.94 7.81 7.55
32
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.
In the first quarter of 2002, the Company raised $350 million of regulatory
capital through the sale of preferred shares issued by a real estate investment
trust subsidiary. In 2001, the Company raised a $1.0 billion of regulatory
capital through its initial issuance under the Global Bank Note program and
raised $600 million of regulatory capital through the issuance of Trust
Preferred Securities.
On April 16, 2002, SunTrust filed a shelf registration with the Securities and
Exchange Commission. Under this registration, the Company may issue debt
securities in one or more offerings up to a total dollar amount of $1.3 billion.
The Company purchased 1.4 million shares of its common stock during the first
three months of 2002. Under current Board resolutions, the Company is authorized
to purchase up to 3.7 million shares.
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 2001.
33
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
. Exhibit 3.3 - Bylaws of the Registrant, amended effective as of
April 16, 2002 is filed herewith.
. The Registrant filed a Current Report on Form 8-K dated February
19, 2002. The purpose of this report was to file as an exhibit
the announcement that SunTrust determined not to renew the
engagement of its independent accountants, Arthur Andersen LLP
and appointed PricewaterhouseCoopers LLP as its new independent
accountant.
. The Registrant filed an Amended Current Report on Form 8-K/A
dated March 20, 2002, which amends the Form 8-K dated February
19, 2002. The purpose of this report was to reflect that, as
anticipated, Arthur Andersen LLP has issued its report on
SunTrust's 2001 financial statements in conjunction with the
March 15, 2002 filing of SunTrust's Annual Report on Form 10-K
for the year ended December 31, 2001, which was amended on Form
10-K/A on April 9, 2002.
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 May, 2002.
SunTrust Banks, Inc.
--------------------
(Registrant)
/S/ William P. O'Halloran
------------------------------------
William P. O'Halloran
Senior Vice President and Controller
(Chief Accounting Officer)
34