SunTrust

(STI) - Get 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.

Credit Crunch

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

Carmike Cinemas

(CKE)

, furniture retailer

Heilig-Myers

(HMY) - Get Report

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.

Ugliness

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.