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(STI) - Get SunTrust Banks, Inc. Report

Tuesday posted third-quarter earnings that beat Wall Street's estimates by a penny. But a jump in nonperforming loans could signal cloudy skies ahead at the regional bank.

The Atlanta-based bank said earnings for the quarter ended Sept. 30 rose 10%, to $1.11 a share from the year-ago $1.01 a share. But amid concerns over credit quality for the banking industry as a whole, investors may find a spike in SunTrust's nonperforming loans particularly troubling. SunTrust's stock was off 88 cents, or 1.9%, to $46.25 Tuesday. The bank's shares have languished since the summer, while other big bank stocks have rallied.

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Nonperforming loans, or loans that are past due but haven't been written off, jumped 60% in the latest quarter, to $381 million from $237 million in the year-ago period. Three credits -- cinema chain

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and an unnamed health-care firm -- accounted for 82% of the quarterly increase in nonperforming assets, CEO L. Phillip Humann said on a conference call with analysts and investors.

"The increase in nonperforming assets was notable," says Marni Pont O'Doherty, banks analyst at

Keefe Bruyette & Woods

, a New York-based bank-stock brokerage.

Other numbers failed to impress as well. Revenue was basically flat with the second quarter and showed a slight decline from a year ago. Net interest income fell 3% in the latest quarter, a decline the company attributed to the sale of its credit card portfolio and the continuing effect of rising interest rates. Meanwhile, noninterest income rose slightly from the year-ago period.


The latest results from SunTrust, which is the nation's 10th-largest bank, will likely set the tone for a string of reports from regional banks in the weeks ahead. Many financial institutions have grappled with a rising interest-rate environment, as the

Federal Reserve

six rate hikes over the past 16 months. Higher interest rates make it more expensive to borrow money, which has squeezed lending margins -- the difference between the rate at which banks borrow money and the rate at which they lend to customers.

Net interest margins endured further declines at SunTrust, falling to 3.47% in the latest quarter, from 3.55% in the second-quarter and 3.87% in the year-ago period.

"We didn't anticipate the rise of nonperformers this quarter," Humann said. "We do expect to see some gradual tick-ups in charge-offs."

Although nonperformers registered an ugly spike, the bank allowed its loan-loss allowance to drop as a percentage of loans, to a level that is already well below the Southeast regional average. The bad loan reserve was equivalent to 1.21% of loans at the end of the third quarter, down from 1.48% in the year-earlier period, and 1.22% in this year's second quarter. The regional average in the second quarter was 1.36%, according to O'Doherty. (Keefe rates SunTrust a market perform and hasn't done underwriting for the bank.) SunTrust would have to add around $100 million to its loan-loss reserve to bring it up to that level. Such a charge would be equivalent to around 33 cents a share, or around a third of third-quarter earnings.