Second-quarter profits to common investors at SunTrust Banks rose 35% to $365 million, or $0.68 a diluted share, from $270 million, or $0.50 a diluted share, a year earlier. Net interest income fell 5% to about $1.2 billion, as reported net interest margin fell to 3.25% from 3.39% in 2012’s second quarter.

However, SunTrust’s earnings were helped by reduced loan-loss provisioning, which dropped to $146 million from $300 million a year earlier. The company’s loanloss allowance stood at 1.75% of total loans in June, down four basis points from March 2013 and off 10 basis points from a year earlier. On a year-over-year basis, noninterest income fell 9% to $858 million, reflecting shortfalls in areas such as trading income (down 30%) and mortgage servicing (down to $1 million from $70 million, mostly as a result of lower net hedging gains).

Declining non-interest expenses once again helped SunTrust, as costs fell 10% year-on-year to $1.4 billion, with savings coming in areas such as compensation. The company’s payroll was trimmed by 8%, falling to 26,199 employees. Branches fell 6%. Although on a sequential basis expenses were higher by 2%, we liked the year-over-year progress on costs.

SunTrust continued to maintain its quarterly provisioning for mortgage repurchases at a reduced levels, as SunTrust provisioned $15 million in the latest quarter, compared with $14 million in the first quarter and $155 million a year earlier. Going forward,  earnings will continue to face headwinds from the low rate environment, which likely will push margins lower in the third quarter. Management expects more margin stability late in the year, which we see as a hopeful sign.

With regards to asset quality, nonperforming loans came to 0.94% of total loans, down 27 and 103 basis points sequentially and on a year-over-year basis, respectively. Net charge-offs came to an annualized 0.59% of average loans, compared with 0.76% in the March quarter and 1.14% in 2012’s second quarter. To put SunTrust’s progress in context, consider that the last full year in which SunTrust’s net charge-off ratio was under 1% was back in 2007, when it stood at 0.35%.