SunTrust Banks Inc. ( STI) shares were falling Thursday, after the Atlanta bank holding company swung to a loss worse than analysts expected.

SunTrust shares were down 8.1% to $14.15 in Thursday trading, after it reported a first quarter net loss of $815 million, compared to a net loss of $348 million in the fourth quarter and net income of $291 million in the first quarter of 2008.

After $67 million in preferred stock dividends and other adjustments, the first quarter loss available to common shareholders was $875 million, or $2.49 per share, which exceeded the Thomsen Reuters consensus earnings estimate of a first quarter loss of 65 cents per share.

An after-tax noncash goodwill impairment charge of $715 million was the main factor in the first quarter loss. If that charge were excluded, the company would have come out ahead of the consensus earnings estimate, with a loss of 46 cents per share.

Another factor hurting most holding companies' earnings is the quarterly provision for loan loss reserves, which for SunTrust was $994 million for the first quarter, increasing from $962 million last quarter and $560 million in the first quarter of 2008.

SunTrust received $3.5 billion in new capital on Nov. 14, selling preferred shares to the U.S. government via the Treasury's Troubled Assets Relief Program, or TARP. SunTrust's capital ratios improved further in the first quarter, as the company reduced its total assets during the quarter by $10 billion to $179 billion, mainly from the sale of securities.

The company's estimated Tier 1 capital ratio was 11%, up from 10.87% the previous quarter and way ahead of the 6% required to be considered well-capitalized under ordinary regulatory guidelines for banks.

The earnings release focused on some positive trends for the company including deposit and loan growth. Average consumer and commercial deposits increased 6% from the fourth quarter, to $107.5 billion. Average loans for the first quarter were $125.3 billion, an increase of 1.6% from the fourth quarter.

CEO James Wells III said that in addition to focusing on "maintaining a strong capital position and mitigating near-term recession-related risk," the company was implementing "initiatives to take advantage of postcycle growth opportunities."

Asset Quality

Here's a snapshot of several commonly used asset quality ratios for SunTrust:

SunTrust Banks, Inc.
- Asset Quality ($millions)
SunTrust Banks, Inc.'s First Quarter 2009 financial suppliment, Highline Financial.(1) SunTrust's earnings release didn't detail government-guaranteed balances in this category.

While we normally include accruing loans past due 90 days or more as "nonperforming loans," we have not done so for SunTrust, since the government guaranteed balances that represent a significant portion of these loans were not detailed in the company's first quarter earnings release.

Also not included in nonperforming loans are restructured loans that are performing according to new terms. These loans totaled $651 million as of March 31, up from $463 million the previous quarter and $31 million in March 2008.

Nonperforming loans increased 18% during the first quarter to $4.6 billion as of March 31. Net charge-offs (actual loan losses) also continued to increase, to $610 million from $552 million in the fourth quarter. The annualized ratio of net charge-offs to average loans was 1.97%, and the company stayed "ahead" of this pace, with reserves covering 2.21% of total loans at March 31.

Residential mortgages and home equity loans accounted for more than half of the nonperforming loans, and the company said that two-thirds of the residential nonperformers had already been written down to their "expected recovery value."

Florida loans represented the largest geographic component of SunTrust's mortgage loans, and a disproportionately high portion of the problem mortgages. Florida loans comprised 30% of the company's $29.8 billion in residential mortgages (excluding home equity lines), but accounted for 49% of the nonperforming mortgages. Things were even worse in the home equity portfolio. Florida home equity lines of credit comprised 39% of the company's $16.5 billion portfolio, but accounted for 61% of the nonperformers.

Another interesting point made by SunTrust was that third-party originated home equity lines had an annualized net charge-off rate of a whopping 14.08% during the first quarter, compared to a charge-off rate of 1.82% for home equity loans the company originated itself. While broker-originated home equity loans totaled just $1.8 billion or 11% of the total home equity portfolio, the difference in quality between these loans and the rest of SunTrust's home equity portfolio is astounding and serves as a lesson in the need for very strong underwriting standards for third-party-originated mortgage loans.

On a brighter note, the company pointed out loans past due 30 to 89 days declined to 1.76% of total loans from 1.81%. However, in SunTrust's conference call, analysts questioned how reliable an indicator of future loan quality this could be, since delinquencies in this category failed to indicate the company's worsening loan quality in previous quarters.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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