SunTrust 2003 Annual Report Download - page 46

44 SunTrust Banks, Inc. Annual Report 2003
MANAGEMENT’S DISCUSSION continued
EARNINGS AND BALANCE SHEET ANALYSIS 2002 VS. 2001
Net income was $1,331.8 million in 2002 compared to
$1,375.5 million in 2001, a decrease of 3.2%. Diluted earnings
per share were $4.66 in 2002 and $4.72 in 2001. After-tax
merger-related expenses associated with the Huntington-Florida
acquisition totaled $39.8 million, or $0.14 per diluted share, in
2002. After-tax expenses totaling $20.2 million, or $0.07 per
diluted share, were incurred in 2001 related to the Company’s
proposal to acquire the former Wachovia Corporation. Additionally,
the Company recorded One Bank initiative charges of $36.5 mil-
lion, net of tax, or $0.13 per diluted share, and $35.5 million,
net of tax, or $0.12 per diluted share, in 2002 and 2001, respec-
tively. The One Bank initiative was completed in the fourth quarter
of 2002.
The continued decline of interest rates impacted operating
results in 2002 and 2001. Net interest income decreased $10.1 mil-
lion to $3,283.2 million in 2002, compared to $3,293.4 million
in 2001. The net interest margin decreased 17 basis points from
3.58% in 2001 to 3.41% in 2002. The decrease in net interest
income and margin was due to multiple factors, including a
decline in loan demand resulting from a sluggish economy, the
shift in the Company’s balance sheet position to slightly asset-
sensitive in anticipation of rising interest rates that did not come
to fruition and the flattening of the yield curve in 2002, which
created an acceleration of prepayments in the mortgage industry.
Net interest income was positively impacted by the high volume
of mortgage refinancing experienced during 2002, which led to
an increase in average loans to be sold into the secondary market
from $2.9 billion in 2001 to $4.4 billion in 2002.
Net charge-offs were $422.3 million, or 0.59%, of average
loans for 2002, compared to $272.4 million, or 0.39%, of aver-
age loans for 2001. The provision for loan losses increased
$194.6 million, or 70.7%, from 2001 to 2002. The increases
were primarily due to an increase in large corporate charge-offs
resulting from the weakened economy. Also, $45.3 million of
additional provision expense was recorded in 2002 to conform
the Huntington-Florida portfolio to SunTrust’s credit standards.
Noninterest income was $2,268.8 million in 2002, com-
pared to $2,051.9 million in 2001. The increase was driven by a
$159.2 million, or 21.2%, increase in service charges on deposit
accounts and other charges and fees as the Company benefited
from increased usage of products and services, a more consistent
pricing strategy throughout the Company’s markets, and a lower
earnings credit rate. Also positively impacting noninterest income
was a $68.5 million, or 63.1%, increase in investment banking
income due to improvements in the performance of the Company’s
capital markets business and the addition of the institutional busi-
ness of Robinson Humphrey during the third quarter of 2001.
Additionally, the Company benefited from increases of $28.9 mil-
lion, or 26.8%, in retail investment services and $18.4 million, or
3.8%, in trust and investment management income. Combined
mortgage production and servicing income decreased $93.9 mil-
lion from 2001 to 2002 due to accelerated amortization of
mortgage servicing rights resulting from increased prepayments
in the low rate environment.
Noninterest expense was $3,219.4 million in 2002, com-
pared to $2,999.9 million in 2001. Personnel expenses
increased $141.1 million, or 8.4%, primarily attributable to
increased benefits costs and the acquisitions of Huntington-
Florida, the institutional business of The Robinson Humphrey
and AMA Holdings, Inc., as well as expenses related to the One
Bank initiative. Also negatively impacting personnel expenses
were increased incentive payments resulting from the high level
of mortgage production in 2002. Other noninterest expense
increased $42.2 million, or 25.0%, from 2001 to 2002 prima-
rily due to $25.0 million related to the standardization of the
financial performance of the Company’s affordable housing busi-
ness. Also impacting noninterest expense was an increase in net
occupancy expense of $18.8 million, or 8.9%, due to the acquisi-
tions of Huntington-Florida and the institutional business of
Robinson Humphrey. Amortization of intangible assets increased
$12.6 million, or 27.3%, due to amortization of intangibles
related to the Huntington-Florida acquisition. In 2001, the
Company recorded $41.7 million of goodwill amortization that
is no longer being amortized in conjunction with the provisions
of SFAS No. 142.
Average earning assets increased $4.3 billion, or 4.7%,
from 2001 to 2002. The acquisition of Huntington-Florida con-
tributed $3.2 billion of the growth in average earning assets.
Average loans increased $1.2 billion, or 1.8%, from 2001 to
2002. Included in the increase was $2.3 billion in average loans
from the acquisition of Huntington-Florida. Average loans held
for sale increased $1.5 billion, or 49.5%, from 2001 to 2002
due to an increase in refinancing activity and mortgage origina-
tions resulting from the low rate environment.
Average interest-bearing liabilities increased $2.7 billion, or
3.5%, from 2001 to 2002. Included in the increase was $3.7 bil-
lion in interest-bearing liabilities related to the acquisition of
Huntington-Florida. Average consumer and commercial deposits
increased $8.7 billion compared to 2001. The acquisition of
Huntington-Florida contributed $3.8 billion of the growth in con-
sumer and commercial deposits. The remaining growth was due
primarily to an increase of 29.3% in money market accounts result-
ing from initiatives taken by the Company to grow retail deposits.
FOURTH QUARTER RESULTS
SunTrust reported $342.5 million, or $1.21 per diluted share,
of net income for the fourth quarter of 2003 compared with
$340.3 million, or $1.20 per diluted share, for the fourth quar-
ter of 2002.