SunTrust's Earnings Fall From Mortgage Items, Refinance Drop

  • Third-quarter EPS of 33 cents, including 33 cents in mortgage settlement and putback items.
  • Excluding charges, operating EPS of 66 cents, missing consensus estimate of 68 cents.
  • Net interest margin narrows.
  • Average commercial and industrial loans grow slightly from Q2, up 10% from year earlier.

NEW YORK ( TheStreet) -- SunTrust ( STI) on Friday reported a "messy" third quarter, as expected, from previously announced mortgage-related items.

The Atlanta lender reported third-quarter net income available to common shareholders of $179 million, or 33 cents a share, compared to $365 million, or 68 cents a share, in the second quarter, and $1.066 billion, or $1.98 cents a share, in the third quarter of 2012, when the company reported a pre-tax gain of $1.9 billion from the sale of its long-term investment in The Coca-Cola Company ( KO).

The third-quarter results were lowered by 33 cents a share, from the following items that were announced on Oct. 10:
  • A settlement of mortgage repurchase claims with Freddie Mac (FNCC), resulting in a cash payment by SunTrust of $40 million
  • A mortgage putback settlement with Fannie Mae (FNMA) for $373 million, which after adjusting for $145 million in credits to SunTrust for prior loan repurchases resulted in a cash payment by the bank of $228 million
  • An agreement to settle claims on SunTrust loans insured by the Federal Housing Administration and also to settle civil claims against the bank under the national mortgage settlement, resulting in a commitment to $500 million in "consumer relief" and a $468 million cash payment
  • A settlement with the Federal Reserve, also under the national mortgage settlement, resulting in a fine of $160 million
  • A $96 million charge related to the sale of servicing rights on roughly $1 billion in mortgage loans

The above items were partially offset by an after-tax benefit of $113 million, following a "taxable reorganization of certain subsidiaries during the third quarter."

Excluding all of the items, SunTrust said its operating earnings for the third quarter came in at 66 cents a share, below the consensus estimate of 68 cents, among analysts polled by Thomson Reuters.

Third-quarter net interest income was $1.208 billion, declining from $1.211 billion the previous quarter and $1.271 billion a year earlier. The net interest margin narrowed to 3.19% in the third quarter, from 3.25% in the second quarter and 3.38% in the third quarter of 2012.

Noninterest income declined to $680 million in the third quarter from $858 million in the second quarter and $2.542 billion in the third quarter of 2012, which included the proceeds of the sale of Coke shares. The results for the most recent quarter were skewed by the myriad special items. Mortgage production income for the third quarter was a negative $10 million, reflecting the special items, but also "lower mortgage production income," which was expected in light of the decline in refinance applications brought about by the increase in long-term interest rates.

Excluding the special items, SunTrust's credit costs continued to decline. The company's third-quarter provision for credit losses was $95 million, declining from $146 million the previous quarter and $450 million a year earlier.

The company saw growth in average total loans of 1% during the third quarter, to $122.672 billion. Average total loans were down 1% from a year earlier. Average commercial and industrial loan balances were flat quarter-over-quarter, but were up 10% from a year earlier, to $54.666 billion.

SunTrust CEO William Rogers said the resolution of the various mortgage items would allow the company to "our efforts on the considerable opportunities that exist in all of our businesses as we concentrate on meeting more clients' needs."

SunTrust's shares were down 1% in premarket trading, to $34.03. The shares closed at $34.03 Thursday, returning 21% this year, and trading for 11.5 times the consensus 2014 EPS estimate of $2.96.

"For the quarter, net interest income and fees (particularly mortgage production revenues) were light, while credit was better and expenses OK," wrote Jefferies analyst Ken Usdin in a note on Friday. "Our initial take is that the EPS run-rate is in the $0.65-$0.70 range which seems light relative to our $3.00 estimate for next year," he wrote.

Usdin rates SunTrust a "hold," with a price target of $36.00.

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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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