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SunTrust Reports a So-So Quarter, Which Is Something to Cheer About

Analysts heave a sigh of relief that the first bank to file averts fears of disappointment.

SunTrust

(STI) - Get SunTrust Banks, Inc. Report

kicked off the bank earnings season with fourth-quarter results that matched expectations, calming investors. But a closer look reveals a lackluster quarter.

The Atlanta-based bank earned $1.12 a share, in line with the 18-analyst estimate, according to

First Call/Thomson Financial

, and up from $1.06 a year ago. Meanwhile, income was $331.9 million, excluding a charge, down from $335.3 million in the year-ago period. A stock buyback program accounted for the 12% increase in per-share earnings.

The day's results for SunTrust stock, which finished regular trading up $1.81, or 3%, at $62.63, reflect a mood that "it could have been worse," especially with regard to problem loans.

"It was a surprisingly decent quarter," says Nancy Bush, banks analyst at

Prudential

, noting improvement in loan growth and net interest margins (the difference between interest earned on loans and investments and the interest paid to depositors) compared with the third quarter. Bush also was encouraged by an increase in assets under management, which rose by $1.5 billion to $93 billion, the first such increase in six quarters. (Bush rates SunTrust hold, and her firm hasn't done underwriting for the bank)

The Quality Issue

Credit quality is the main issue at many banks, as investors keep a close watch on levels of bad loans. After surging 60% in the third quarter, SunTrust's nonperforming assets, loans that are past due but haven't been written off yet, rose a modest 6%, to $428.27 million from $404.53 million. Bush called the increase "reasonable, given their credit quality" in the prior quarter and said it has people sort of thinking, "What is all the fuss about?"

"People were probably gearing up, thinking there was greater deterioration for credit quality," says Chris Marinac, banks analyst at

Robinson-Humphrey

. (He rates SunTrust an outperform, and his firm hasn't done any underwriting for the bank.)

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But Marinac points out that the bank, which operates from Maryland to Florida and as far west as Tennessee, has been merely maintaining its loan-loss reserve, rather than adding to it. That, he says, is a less-than-encouraging sign, given the increase in nonperformers in recent quarters. The latest addition to the loan-loss reserve (a financial cushion to cover bad loans), was $53.45 million, which was in line with net charge-offs.

Locating the Problems

In a conference call with analysts and investors, SunTrust broke out some of its exposure, pointing out that a large health care credit accounted for $12 million of charge-offs. SunTrust also said it had moved $25 million worth of exposure to

Armstrong Holdings

(ACK)

, which is in Chapter 11 bankruptcy, to nonperforming status in the quarter. The bank also said it was a lender to

Owens Corning

(OWC)

and

Carmike Cinemas

(CKE)

, both of which also have filed for Chapter 11 protection.

Banks usually don't comment on client relationships or disclose their loan exposure, but SunTrust did so because the troubled companies already have filed for bankruptcy. SunTrust also pointed out that it hasn't made loans to the power companies in California that are currently causing some

hand-wringing among analysts.

Marinac also says that SunTrust's revenue growth leaves a lot to be desired. "The company is putting a positive spin on what they expect to happen, but they have yet to deliver on revenue growth," he says.