SunTrust Banks, Inc.’s (STI) third-quarter 2014 adjusted earnings of 81 cents per share lagged the Zacks Consensus Estimate by a penny. However, the reported figure compared favorably with 66 cents earned in the year-ago quarter.

Results excluded the tax benefit of $130 million or $0.25 per share, due to completion of a tax examination.

Results were supported by both rise in revenues and fall in expenses. Moreover, improvement in credit quality, rise in loan and deposit balances, and improved profitability ratios acted as tailwinds, while capital ratios deteriorated.

Considering certain non-recurring items, net income available to common shareholders was $563 million or $1.06 per share, up from $179 million or 33 cents per share in the prior-year quarter.

Quarterly Performance

Total revenue came in at $2.03 billion, up 5.8% from the prior-year quarter. However, the reported figure was slightly lower than the Zacks Consensus Estimate of $2.06 billion.

Net interest income inched up 0.9% year over year to $1.25 billion. However, net interest margin fell 16 basis points (bps) from the year-ago quarter to 3.03%, mainly due to lower loan yields.

Non-interest income was $780 million, up 14.7% year over year. The rise was largely driven by gains on mortgage repurchase provision and higher mortgage servicing income, partially offset by the foregone RidgeWorth wealth management revenue.

Non-interest expense was $1.26 billion, decreasing 27.2% year over year. Notably, operating expenses during the prior-year quarter included charges related to legal settlement. Excluding this legal charge, non-interest expenses declined slightly.

SunTrust’s efficiency ratio dropped to 62.03% from 90.13% in the prior-year quarter. A decline in efficiency ratio indicates improved profitability.

As of Sep 30, 2014, SunTrust had total assets of $186.8 billion while shareholders’ equity was $22.3 billion, representing 12.10% of the total assets.

As of Sep 30, 2014, loans totaled $132.2 billion, up 6.3% year over year. Total consumer and commercial deposits were $135.1 billion, up 6.5% from the year-ago quarter figure.

Credit Quality

Credit quality continued to improve during the quarter. Nonperforming loans fell 25 basis points (bps) year over year to 0.58% of total loans. Similarly, rate of net charge-offs decreased 8 bps from the year-ago quarter to 0.39% of annualized average loans.

Moreover, provision for credit losses declined 2.1% from the prior-year quarter to $93 million.

Capital & Profitability Ratios

As of Sep 30, 2014, SunTrust’s capital ratios deteriorated, although its profitability ratios improved. Tangible equity to tangible asset ratio declined 4 bps year over year to 8.94%. Further, Tier 1 common ratio declined 34 bps to 9.60% and Tier 1 capital ratio was down 47 bps to 10.50%.

As of Sep 30, 2014, book value per share and tangible book value per share improved from the prior-year quarter level to $40.85 and $29.21, respectively.

Share Repurchase

During the quarter, SunTrust bought back shares worth $215 million. In addition to this, the company expects to buy back nearly $230 million of additional common shares in the next two quarters.

Our Viewpoint

We believe that disciplined expense management, strong credit quality and a favorable deposit mix will continue to support SunTrust’s financials. Further, the company’s enhanced capital deployment activities reflect its strong balance sheet position.

Nevertheless, we remain concerned about the company’s exposure to risky assets and its limited margin improvement. At the same time, a persistent low interest rate environment and prevalent industry challenges might affect its top-line growth in the near term.

SunTrust currently carries a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Among other major regional banks, Citigroup Inc. (C) reported third-quarter 2014 adjusted earnings per share of $1.15, outpacing the Zacks Consensus Estimate of $1.12.

JPMorgan Chase & Company (JPM) posted third-quarter earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39.

Wells Fargo & Company (WFC) earned $1.02 per share in third-quarter 2014, which came in line with the Zacks Consensus Estimate.

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