SunTrust Banks Inc. smoothed a few wrinkles from its commercial credit portfolio during the first quarter by shedding three large nonperforming corporate loans totaling $69 million, but said asset quality remains an area of concern.
In its first-quarter profit report Wednesday, the Atlanta company said favorable prices on the secondary loan market enabled it to sell its stake in loans to two troubled Southeast-based theater operators, Carmike Cinemas Inc. of Columbus, Ga., and Regal Cinemas Inc. of Knoxville, Tenn., and a third stake in a loan to a health-care company.
With the sales, SunTrust eliminated three of its biggest commercial loan headaches, but executives warned that credit quality is likely to remain a concern for the rest of the year. "This party's not over yet," said L. Phillip Humann, chairman and chief executive officer, during a conference call. "We're not seeing any new industries that are cropping up as troubled. But clearly there are some very troubled industries out there."
SunTrust traditionally leads off the quarterly earnings season for commercial banking companies, and the first quarter shows signs that bankers are working to turn several quarters of weakening performance around. Its profits rose 5.7% from a year earlier, to $337.5 million, helped by loan growth and positive trends in most of its businesses. Per-share earnings of $1.14 beat the consensus estimate of analysts by a penny.
Meanwhile, BB&T Corp. of Winston-Salem, N.C., said profits for the period rose 15%, to $218 million, thanks to strong growth in loans and fees. Per-share earnings of 59 cents were in line with analysts' expectations.
BB&T's results included $100 million of pre-tax charges to account for writedowns in the value of mortgage servicing rights and to account for acquisitions.
Executives from BB&T said during a conference call that they are comfortable with earnings estimates of $2.44 a share for this year.
Though the company has several mergers in the works, John Allison, its chairman and chief executive, said he is plotting others, particularly for nonbank financial institutions such as insurance firms and asset managers.
But competition for acquisitions is increasing, especially as other banking companies look for ways to boost their insurance businesses. "The only problem is everyone else is doing that," Mr. Allison said. "Pricing has gone up, particularly in the larger agencies."
BB&T has begun talking to smaller asset management firms and expects to announce more deals in the coming months, he said.
Mr. Humann said there are still weak spots in the southeastern economy, such as the textile and furniture industries, which remain important in the region. SunTrust previously has talked about troubles with a large syndicated loan to Heilig-Myers, a Richmond, Va., furniture retailer.
SunTrust also is watching credit trends among consumers, Mr. Humann said. "Consumer losses are up, but they are manageable and under control."
Though nonperforming assets rose 18% from a year earlier, to $369 million, they were lower than in the previous two quarters.
Analysts said they were pleased with the report. "Credit quality was important," said Lori Appelbaum of Goldman Sachs & Co. "They're actively cleaning up, and their base" loan "portfolio didn't show any deterioration. On top of that, they've got some good business momentum."
Ms. Appelbaum said she saw positive trends in many of SunTrust's business lines, including sales of loans, mutual funds, and mortgages, as well as growth in deposits and fees.
During the quarter SunTrust recorded a $53 million gain from the sale of its stake in the electronic transaction network Star Systems Inc.
Net interest income rose 2.8%, to $805 million. Income from fees was up 9%, to $469 million. SunTrust's net interest margin slipped 10 basis points, to 3.6%.
Shares of SunTrust rose 0.4% Wednesday, to close at $63.87.
Despite the slowing economy, the company's first-quarter average loans grew 12.4% from a year earlier, and fees grew 20.7%.
Michael Mayo, an analyst at Prudential Securities Inc., said lending trends at both BB&T and SunTrust defied conventional wisdom about the economy.
"The strong loan growth at both SunTrust and BB&T is inconsistent with an economy that's slowing too much," he said.
BB&T also reported a $63 million pre-tax gain on the sale of its 7.7% stake in Star Systems.
Shares of BB&T declined 1%, to $34.63.