SunTrust, SouthTrust, Mercantile Gain; 1st Virginia Off

Good loan growth helped boost second-quarter earnings at SunTrust Banks Inc. to $140.9 million, up 7% from a year earlier. But a shrinking net interest margin and sluggish fee income demonstrated how SunTrust, like many of its peers, is struggling with higher deposit costs.

"Loan growth is still pretty good in the Southeast, yet the banks have exhausted their supply of core deposits," said George Bicher, an analyst with Alex. Brown & Sons. "Now they're having to turn to increasing rates on certificates of deposit and go to the wholesale market for funding."

Since most southeastern banks face higher deposit costs, loan growth and a few other factors such as lower credit expenses made the difference in whether a company was able to exceed its year-ago results.

Net income was up 13% at Birmingham, Ala.-based SouthTrust Corp. and up 19% at Mercantile Bankshares, Baltimore, but was down 5% at First Virginia Banks Inc., a consumer-oriented bank in Falls Church that was hit hard by the recent slump in auto sales.

Synovus Financial Corp., Columbus, Ga., is a special case, attributing its 18% earnings gain to revenues from its data processing subsidiary, Total System Services Inc., and an improved net interest margin.

Annualized loan growth at Atlanta-based SunTrust was 11% in the second quarter, led by commercial credits and residential mortgages, though this was down from 15% in the first quarter. In addition, SunTrust reduced its loan-loss provision by 23% to $26.2 million and bought back half a million shares during the quarter, which spread earnings over a smaller base.

"We've seen good loan growth, but because of the difficulty in attracting low-cost deposits, there's been a lot of pressure on margins," said spokesman Jim Armstrong. SunTrust's net interest margin fell 11 basis points from the first quarter to 4.47%, following a 7-point decline in the previous quarter.

Fee income also remains a problem. Noninterest income overall was down 2% to $174.2 million from $177.2 million in the year-earlier period.

"Fee income is just tough to come by," Mr. Armstrong said. "As interest rates go up, fee income tends to go down - you sell fewer mutual funds, you have less mortgage originations, and the commercial customers that hold deposit accounts pay lower fees because they're getting higher credit for balances."

SunTrust has been losing corporate trust accounts for several quarters now because of lagging performance from its money managers. In addition, an accounting glitch related to service charges in the first quarter forced SunTrust to understate fee income in the second quarter by $2 million.

SouthTrust also sustained some pressure on its margin, which fell 10 basis points to 3.98% from the first quarter. But the company, which has $19 billion of assets, was able to overcome that drag with robust loan grown, up 22% annualized, led by business and commercial real estate credits.

Margin pressure was also a theme at First Virginia, which has $7.9 billion of assets. The margin fell 11 basis points from the first quarter, to 5.01%, in tandem with slack consumer loan demand, mostly in the auto category.

"Because consumer loans are 80% of our portfolio, the weakness in consumer demand dominated our numbers," said chief financial officer Richard F. Bowman, adding that auto sales improved after Memorial Day.

First Virginia's earnings of $27.6 million were down 5% from the '94 quarter and earnings per share of 81 cents came in 3 cents below the consensus.

Mercantile, with $5.9 billion of assets, earned $26.1 million in the quarter, compared with $22 million. The company benefited from a shift in earning assets from securities to higher-yielding loans. +++ SunTrust Banks Inc. Atlanta Dollar amounts in millions (except per share) Second Quarter 2Q95 2Q94 Net income $140.9 $131.4 Per share 1.22 1.09 ROA 1.36% 1.34% ROE 18.56% 17.84% Net interest margin 4.47% 4.68% Net interest income 427.1 419.0 Noninterest income 174.2 177.2 Noninterest expense 349.7 351.4 Loss provision 26.2 33.9 Net chargeoffs 12.0 11.8 Year to Date 1995 1994 Net income $276.9 $258.5 Per share 2.40 2.13 ROA 1.35% 1.33% ROE 18.51% 17.72% Net interest margin 4.52% 4.64% Net interest income 852.1 822.5 Noninterest income 351.1 357.8 Noninterest expense 707.8 697.4 Loss provision 51.7 67.8 Net chargeoffs 23.5 27.1 Balance Sheet 6/30/95 6/30//94 Assets $44,248 $40,865 Deposits 31,683 31,043 Loans 30,080 26,749 Reserve/nonp. loans 371% 277% Nonperf. loans/loans 0.61% 0.82% Nonperf. assets/assets 0.57% 0.83% Nonperf. assets/loans

+ OREO 0.84% 1.27% Leverage cap. ratio NA 6.80% Tier 1 cap. ratio NA 8.42% Tier 1+2 cap. ratio NA 10.58% ===

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