SunTrust Beats, But Mortgage Origination Revenue Declines (Update 1)

  • Fourth-quarter EPS of 65 cents beats the consensus estimate of 61 cents.
  • Solid mortgage revenue of $241 million as mortgage putback provision down $359 million, but lower mortgage origination volume.
  • Investment Banking income up 29% sequentially, 35% year-over-year.
  • Expenses down significantly from third-quarter, following elimination of 1,200 staff positions.
  • Fourth quarter ROA of 0.81%, ROCE of 6.86%.

Updated with late market action and comment from Jefferies analyst Ken Usdin and Stifel Nicolaus analyst Christopher Mutascio.

NEW YORK ( TheStreet) -- SunTrust ( STI) CEO William Rogers on Friday said that the company's "favorable performance trends continued," during the fourth quarter.

The Atlanta lender company reported fourth-quarter net earnings available to common shareholders of $350 million, or 65 cents a share, beating the consensus estimate of a 61-cent profit, among analyst polled by Thomson Reuters.

Earnings declined from $1.066 billion, or $1.98 a share in the third quarter, when the company took several actions to strengthen its balance sheet, including the sale of its stake in Coca-Cola ( KO), with the combined actions improving earnings by $1.40 a share. During the fourth quarter of 2011, SunTrust earned $71 million, or 13 cents a share.

The company said that "excluding securities gains, revenue increased $388 million from the prior quarter and $262 million from the prior year."

SunTrust's shares were down 2% in the final hour of trading, to $28.91.

SunTrust's fourth-quarter noninterest income totaled $1.015 billion, declining from $2.542 billion in the third quarter (which included $1.941 billion in securities gains, primarily from the Coke sale), but increasing from $723 million in the fourth quarter of 2011.

Fourth-quarter mortgage production income totaled $241 million, improving from negative figures of $64 million in the third quarter and $62 million in the fourth quarter of 2011. SunTrust's mortgage repurchase provision declined by $359 million in the fourth quarter, to $12 million.

The company's investment banking income rose 29% sequentially and 35% year-over-year, to $112 million in the fourth quarter.

Net interest income for the fourth quarter was $1.246 billion, declining from $1.271 billion the previous quarter and $1.294 billion a year earlier. SunTrust's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.36% in the fourth quarter, from 3.38% in the third quarter and 3.46% in the fourth quarter of 2011.

SunTrust's noninterest expense totaled $1.510 billion in the fourth quarter, declining from $1.726 billion the previous quarter, and $1.667 billion a year earlier. The company said that "the sequential quarter decrease of $216 million was primarily due to expenses recognized in the third quarter, including the loss related to the expected sale of affordable housing investments, the charitable contribution of the KO shares to the SunTrust Foundation, and severance expense."

SunTrust's fourth-quarter expenses also declined from the third quarter because employee expenses were down $42 million, mainly "attributable to a reduction of over 1,200 full-time equivalent employees during the quarter." Fourth-quarter expenses included $32 million related to the foreclosure settlement between federal regulators and the nation's largest mortgage loan servicers.

The year-over-year expense decline "was due to lower operating losses, including an accrual for a potential national mortgage servicing settlement recognized last year, as well as decreases in credit-related expenses."

The company's credit quality continued to improve, with a year-end ratio of nonperforming loans to total loans of 1.27%, compared to 1.42% the previous quarter and 2.37% a year earlier. SunTrust's fourth-quarter provision for credit losses was $328 million, declining from $450 million in the third quarter, but up slightly from $327 million in the fourth quarter of 2011.

SunTrust said that its Tier 1 common equity ratio increased to 10.0% as of Dec. 31, from 9.82% the previous quarter.

The company's total loans held for investment declined to $121.470 billion as of Dec. 31, from $121.817 billion the previous quarter, and $122.495 billion the previous year, as the company continued to wind-down its commercial real estate and construction loans, with the sequential decline also reflecting "sales of government guaranteed mortgage and student loans." However, coveted commercial and industrial balances grew 3% sequentially and 9% year-over-year, to $54.048 billion, as of Dec. 31.

SunTrust's shares closed at $29.57 Thursday, trading for 1.1 times their reported Dec. 31 tangible book value of $25.98, and for 11 times the consensus 2013 EPS estimate of $2.69. The consensus 2014 EPS estimate is $2.97.

Jefferies analyst Ken Usdin said in a note that SunTrust's fourth-quarter "expenses looked particularly good as the ramp to '13 estimates now looks less steep," leading him to stick with his 2013 EPS estimate of $2.70 and his 2014 EPS estimate of $2.85.

Usdin continues to rate SunTrust a "Hold," with a $32 price target, but said that "At 10x '14 earnings, we believe STI offers investors good relative value and one of the few stories where mid-single digit EPS growth is possible in '14."

Stifel Nicolaus analyst Christopher Mutascio also rates SunTrust a "Hold," and said the company's "mortgage origination income came in at$241 million during the quarter, versus our $292 million estimate, and was downfrom core mortgage origination income of $307 million in 3Q12 (which excludes the company's large repurchase reserve build last quarter).""The miss on mortgage banking origination income comes despite the fact thecompany's provision for loan repurchases was just $12 million in the quarter," Mutascio said, adding that the putback provision "seems low given what other banks have been recording this quarter."

Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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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