• First-quarter net income to common shareholders of $340 million, or 63 cents a share.
  • Earnings beat the consensus EPS estimate of 61 cents.
  • Provision for credit losses down to $212 million from $328 million in Q4.
  • Mortgage production revenue declines to $159 million from $241 million in Q4.
  • Expenses see broad decline of 10% quarter over quarter and 12% year over year.

Updated from 8:11 a.m. ET with late morning market action and comment from Jefferies analyst Ken Usdin.



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(STI) - Get Report

on Friday reported sharp declines in credit costs and other expenses, helping the company mitigate the effect of a large and expected sequential decline in mortgage production income.

The Atlanta-based regional lender reported first-quarter net income available to common shareholders of $340 million, or 63 cents a share, compared to $350 million, or 65 cents a share, in the fourth quarter, and $245 million, or 46 cents a share, in the first quarter of 2012.

First-quarter net interest income was $1.221 billion, declining from $1.246 billion the previous quarter, and $1.311 billion a year earlier. The main factor in the sequential decline was the lower number of days in the first quarter. SunTrust's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.33% in the first quarter from 3.36% in the fourth quarter and 3.49% a year earlier.

Average performing loans were $119.4 billion in the first quarter, down 1% from the previous quarter and from a year earlier, as planned declines in student loans and residential mortgage loans were partially offset by increases in commercial and industrial loans and indirect auto loans.

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The first-quarter provision for loan losses was $212 million, declining from $328 million in the fourth quarter and $317 million in the first quarter of 2012. SunTrust's asset quality continued to improve, with a ratio of nonperforming loans to total loans of 1.21% as of March 31, compared to 1.27% in December and 2.16% in March 2012. The annualized ratio of net charge-offs to average loans was 0.76%, improving from 1.30% the previous quarter and 1.38% a year earlier.

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First-quarter non-interest income totaled $863 million, declining from $1.015 billion in the fourth quarter, and $876 million a year earlier. Mortgage production revenue in the first quarter was $159 million, declining from $241 million the previous quarter, but increasing from $63 million a year earlier. The sequential decline in mortgage income was expected, with refinance volumes declining and lower gains on the sale of new loans in the secondary market.

The bank also saw declines in revenue from account service charges, investment banking and mortgage servicing.

SunTrust offset nearly all of its revenue declines with the lower credit provision and with lower expenses. First-quarter non-interest expenses declined to $1.363 billion from $1.510 billion in the fourth quarter, and $1.541 billion in the first quarter of 2012. Expenses were down in all categories except for employee compensation and benefit expenses, which for the first quarter totaled $759 million, increasing from $738 million the previous quarter, but declining from $797 million a year earlier. Most banks see a spike in compensation expenses during the first quarter, for annual incentives, and especially this year, for increasing health insurance costs.

The biggest decline in non-interest expense was in the "other" category, which totaled $163 million in the fourth quarter, down from $261 million in the fourth quarter and $285 million a year earlier. The company saw lower expenses for mortgage repurchase claims, legal services, consulting fees, and marketing.

SunTrust CEO William Rogers said the bank's "expenses declined meaningfully, not only related to the continued abatement of cyclically high costs, but also as a direct result of our concerted efforts to improve our efficiency."

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SunTrust's efficiency ratio improved to 64.46 in the first quarter from 65.93 the previous quarter and 69.50 a year earlier. The efficiency ratio is, essentially, the number of pennies of expenses a bank incurs for each dollar of revenue.

The company's first-quarter return on average assets was 0.83%, improving from 0.81% in the fourth quarter and 0.57% in the first quarter of 2012. SunTrust's return on average common equity for the first quarter was 6.77%, compared to 6.86% the previous quarter and 4.94% a year earlier.

The company's estimated Basel I Tier 1 common equity ratio was 10.10% as of March 31, increasing from 10.04% in December.

Investors were impressed with SunTrust's cost-cutting, sending the bank's stock was up 4% in late morning trading, to $28.35.

Jefferies analyst Ken Usdin has a "hold" rating on SunTrust, with a $31 price target, and in a note to clients early on Friday wrote that "the beat looks pretty clean as strength in credit and expenses offset greater-than-expected declines in mortgage banking. There is some concern on how STI improves the EPS run rate from here, but the stock has underperformed enough in recent weeks that it might hold up ok on the report."

SunTrust's shares closed at $27.32 Thursday, pulling back 3% year-to-date, following a 62% return during 2012. The shares trade just above their reported March 31 tangible book value of $26.33, and for 9.4 times the consensus 2014 EPS estimate of $2.92. The consensus 2013 EPS estimate is $2.67.

SunTrust in March said it would repurchase up to $200 million worth of shares through the first quarter of 2014, and that at its next board of directors meeting would consider doubling its quarterly dividend to 10 cents a share.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.