SunTrust Bank (STI) posted a loss of $377.1 million or 76 cents per share, wider than the Zacks Consensus Estimate loss of 63 cents per share. This was compared to a net income of $304.4 million or 87 cents per share in the third quarter of 2008.

The decline in earnings was attributable to the $390.8 million after-tax increase in the provision for loan losses and a $292.8 million after-tax increase in valuation losses associated with the fair value of SunTrust’s public debt. Net loss for the quarter was also $133.5 million higher than the previous quarter, driven primarily by a $106.5 million after-tax increase in provision for loan losses.

Revenue

Fully taxable-equivalent total revenue tumbled 21% to $1.94 billion in the quarter. The decrease in revenue reflected an $81.8 million gain on sale of a fuel card and fleet management subsidiary, besides a $172.8 million valuation reserve related to the expected purchase of auction rate securities in the third quarter of 2008.

The decline was also affected by a $341 million market valuation gain on public debt and related hedges carried at fair value recognized in the third quarter of 2008 compared to a $131.3 million market valuation loss in the current quarter. The remaining decline in fee-related income occurred in cyclically sensitive areas such as trust and investment income and service charge income.

Net Interest Income

Fully taxable-equivalent net interest income decreased marginally (0.6%) to $1.17 billion. Net interest margin increased 3 basis points compared to the prior-year quarter. Net interest margin benefited from deposit volumes, mix and lower rates, as well as the repayment of certain long-term debt and hybrid capital instruments that has occurred throughout 2009.

Average earning assets declined $2.7 billion compared to the year-ago quarter due to a decline in loan demand. However, the reduction in interest income from this decline in average earning assets was offset by a reduction in SunTrust’s cost of funds due to a significant increase in consumer and commercial deposits as well as an improved mix in client deposits, which enabled a significant reduction in higher cost long-term debt and brokered deposits. Net interest income and margin continue to be adversely affected by the current level of nonperforming loans.

Non-Interest Income

Total non interest income went down 40% to $775.1 million. Investment banking income increased significantly due to higher capital market activity including strong debt and equity underwriting activity.

Mortgage production income was $28.1 million compared to $50 million in the third quarter of 2008. Production was up 42% year-over-year. Mortgage servicing related income was $60.2 million, down slightly from the third quarter of 2008. As of Sept. 30, 2009, SunTrust serviced $177.6 billion in mortgage loans, up 11.5% from a year ago.

Non-Interest Expense

Total non-interest expense fell 14% to $1,428.8 million. Total personnel expense decreased 4.3% as personnel decreased 4.9% from 29,447 as of Sep 30, 2008 to 28,015 as of Sept. 30, 2009. Incentive expenses declined in order to align discretionary incentive compensation accruals with business performance. However, pension costs increased about $25.8 million due to an increase in pension obligation on the back of 2009 market valuation assumptions.

Balance Sheet and Asset Quality

As of Sept. 30, 2009, SunTrust had total assets of $172.7 billion and shareholders’ equity of $22.9 billion, constituting 13.3% of total assets. Book value per common share was $36.06 and tangible book value per common share was $23.35 as of Sept. 30, 2009. The estimated Tier 1 common equity, Tier 1 capital and total average shareholders’ equity to total average assets ratios at Sep 30, 2009, were 7.45%, 12.55% and 13.03%, respectively.

The allowance for loan and lease losses was $3.02 billion as of Sept. 30, 2009, up $128 million from June 30, 2009. This represented 2.61% of period-end total loans, up 107 basis points from one year ago. The increase in allowance was attributed to further deterioration in the residential real estate market.

Net charge-offs increased across most loan categories from $613.9 million to $1.01 billion, with the largest increase in residential mortgages ($254.3 million), commercial ($146.6 million) and construction ($106.7 million).

Nonperforming loans were $5.44 billion or 4.67% of the total loans as of Sept. 30, 2009. This was a decline of $59.6 million compared to June 30, 2009, representing the first quarterly decline since the credit crisis began in 2007, driven primarily by a reduction in non-accrual commercial loans. Accruing restructured loans increased $418.6 million to $1,343.6 million due to steps taken in modifying loans in order to mitigate loss exposure to borrowers experiencing financial difficulty.

The Atlanta, GA-based bank operates as the holding company for SunTrust Bank. The company offers various deposit products, residential mortgage products and financial services to consumer and corporate customers in the U.S. We recommend the shares of the bank as Neutral.
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