SunTrust Feels Rate Squeeze

It misses estimates on a fall in interest revenue.
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Updated from 8:54 a.m. EDT

SunTrust's

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net income declined 4% from a year ago, as low interest rates squeezed the southeast regional bank's lending operation.

In the quarter, the Atlanta-based bank, which traditionally is the first major bank to report earnings, earned $330.4 million, or $1.17 a share, compared with $343.7 million, or $1.20 a share, a year ago.

The bank's second quarter earnings came in a penny shy of the Thomson First Call estimate of $1.18 a share. Despite the slight miss, the bank, in a press release, said its quarterly report contained "no surprises.''

SunTrust shares, in early trading, were down 45 cents, or just under 1%, to $60.52.

SunTrust's earnings are watched closely by bank analysts and investors because they're often seen as a bellwether for other banks. Many of the company's peers are due to post second-quarter numbers next week, beginning with

Citigroup

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and

Bank of America

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on Monday.

Based on the SunTrust numbers it appears the theme for the second quarter may well be the big crimp low interest rates are putting on net interest margins -- a ratio that measures the difference between the amount of money banks charge on loans and the interest payments they make to depositors.

In the quarter, the net interest margin at SunTrust declined to 3.05%, from 12.4% a year ago. Meanwhile, net interest income -- the revenue SunTrust actually generated from its lending operation -- slipped by 1.7% to $799.5 million.

The bank attributed much of the margin pressure to a decline in the value of mortgage-backed securities it owns. Low interest rates caused a spike in early prepayments on those securities.

Banks invest in mortgage-backed securities and other bonds to offset the money they pay out to depositors in interest. SunTrust executives said they have been moving to reposition the bank for an expected rise in interest rates by selling some poor performing investments.

The good news for SunTrust was the continuing improvement in the level of bad loans in its portfolio. Last year a sharp rise in bad loans at the nation's banks weighed down earnings.

In the quarter, SunTrust said it charged off $82.2 million in nonperforming assets, roughly the same amount as in the first quarter. Additionally, the total dollar value of nonperforming loans and other assets in the second quarter was $515.4 million, down from $548.4 million at the end of the first quarter.

In a morning conference call with analysts, SunTrust executives put a sunny spin on the bank's earnings. They spoke of better days ahead, even as officials admitted there's little evidence yet of the much-anticipated second-half economic rebound. The bank executives talked about an "imminent'' recovery in corporate borrowing and an expected improvement in margins, as interest rates could rise later in the year.

Philip Humann, SunTrust's chairman and chief executive, said the bank is well-positioned to profit from a resurgence in corporate borrowing, "which we believe is all out there.''