SunTrust Banks Net Down 82%
--Company to pay more than $1 billion to settle government probes
--CEO: Mortgage revenue challenges are likely permanent
--Company sees opportunities in commercial real-estate lending
A slew of mortgage issues hammered SunTrust Banks Inc.'s ( STI ) third-quarter earnings, as the Atlanta lender agreed to
shell out more than $1 billion to end several legal issues while grappling with a slump in loan refinancing that has
slammed the banking industry.
SunTrust on Friday said its profit fell 82% from a year earlier, as expenses related to a settlement reached with
government agencies over the bank's mortgage origination and servicing activities hit results.
Mortgage income also was pressured, as originations fell due to rising interest rates, which has caused a slowdown in
refinancing activity that CEO William Rogers Jr. warned is likely to pose long-term headwinds.
"I am viewing the mortgage revenue challenges as more permanent," Mr. Rogers said during a conference call with
SunTrust reported a profit of $189 million, or 33 cents a share, down from $1.08 billion, or $1.98 a share, a year
Last year, the company posted a gain of about $1.9 billion related to the sale of Coca-Cola Co. (KO) stock. Excluding
the mortgage-settlement costs and stock-sales gains from a year earlier, earnings were 66 cents a share, up from 58
Revenue, excluding securities gains, rose 0.9% from the year before to $1.92 billion.
Analysts polled by Thomson Reuters were expecting the company to earn 69 cents per share on revenue of $2.07 billion.
SunTrust's shares were up 1% at $34.06 in recent trading. The shares have risen more than 19% this year.
Like other banks, SunTrust has operated under a cloud of regulatory scrutiny tied to mortgage practices during the
financial crisis, including lenders' handling of foreclosures and interactions with borrowers in distress.
To resolve many of those issues, SunTrust earlier this month announced agreements with Justice Department, Department
of Housing and Urban Development and Federal Reserve under which it will pay more than $1 billion to settle various
probes. The issues include its origination of loans insured by the Federal Housing Administration and its loan-servicing
SunTrust also said it would pay more than $200 million to government-controlled mortgage firms Freddie Mac (FMCC) and
Fannie Mae (FNMA) to resolve so-called repurchase requests. Freddie and Fannie buy mortgages from lenders, providing
them with a guarantee against future losses. But they can force lenders to buy back mortgages that don't adhere to the
firms' underwriting standards.
Settling the issues "helps us reduce uncertainty in the business and improves our overall risk profile," Mr. Rogers
said during the call.
SunTrust still faces a government investigation over how it handled borrowers' application for loan workouts under the
Home Affordable Modification Program.
For the quarter, the bank's net interest margin, a measure of lending profitability, narrowed to 3.19% from 3.38% a
year earlier and 3.25% in the second quarter.
The company's net interest margin is expected to decline again in the fourth quarter, though at a slower pace than in
the third quarter, Chief Financial Officer Aleem Gillani said during the call.
The provision for credit losses was $95 million in the quarter, down from $450 million a year earlier and $146 million
in the prior quarter, as loan quality improved.
The company has been cutting costs to offset slow loan growth and low interest rates. However, noninterest expense was
up 1% from a year before to $1.74 billion, driven partly by $323 million in costs related to the mortgage settlements.
SunTrust reported a plunge in mortgage-production income, which fell to a loss of $10 million from $133 million of
income in the second quarter due to lower originations and sale margins. The results were improved from a loss of $64
million a year earlier, though, as SunTrust set aside less money for mortgage-repurchase requests.
A bright spot for the bank was commercial real-estate lending, an area in which SunTrust has been increasing its focus
after having purged construction loans that went bad during the recession. Commercial real-estate loans increased 5.8%
to $4.8 billion in the quarter.
The commercial real-estate business has "officially made the turn," Mr. Rogers said. "That business now is in sort of
In August, SunTrust announced a deal with MetLife Inc. (MET) under which the bank will fund up to $5 billion of
commercial mortgages originated and managed by the insurer.
SunTrust, like other regional lenders, saw only modest overall loan growth in the quarter, with its portfolio
increasing 2.1% to $124.3 billion.
The slowdown in mortgage refinancing due to rising interest rates in the last several months has put additional
pressure on banks to cut costs.
SunTrust earlier this week said it was slashing 800 mortgage jobs due to a slowdown in mortgage activity. Wells Fargo
& Co. (WFC), the nation's largest home lender, said Wednesday it was laying off 925 employees, bringing its total number
of mortgage job cuts to about 6,200 since July.
Citigroup Inc. (C), Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) have also announced thousands of
layoffs this year.
Write to Andrew R. Johnson at email@example.com and Ben Fox Rubin at firstname.lastname@example.org
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
Copyright (c) 2013 Dow Jones & Company, Inc.