SunTrust Banks' (STI) second-quarter results looked solid compared to other regional banks, thanks to a surge in mortgage refinancing and strong growth in commercial lending.

Concerns remain, however, about SunTrust's progress on a cost-cutting program and whether the Atlanta company might yet sustain more pain from mortgage repurchases requests.

SunTrust has committed to trim expenses by $300 million a year but in a conference call Friday, analysts seemed disappointed that second-quarter cuts were largely offset by higher compensation costs. Though the company has already reached $250 million of savings year to date, Christopher Mustacio, an analyst at Stifel Nicolaus, pointed out that adjusted noninterest expense has declined by only 0.7% since the second quarter of 2011, to $1.53 billion.

SunTrust also bought back more soured mortgages from Fannie Mae and Freddie Mac in the second quarter than it did the first and Paul Miller, an analyst at FBR Capital Markets, wondered if that trend might continue, given that other banks have said that they expect repurchase requests to pick up toward the end of the year.

SunTrust officials downplayed the concerns, however.

Chairman and Chief Executive Bill Rogers said that the company is on pace to achieve its cost-cutting goals and noted that employee compensation rose during the quarter because SunTrust is bringing in more business. He noted, too, that core expenses climbed only 1.5% during the quarter while core revenues rose 5%.

"That's a really good trade," he said. "We're paying people on commissions, but at the same time reducing core costs."

On the matter of mortgage repurchases, Chief Financial Officer Aleem Gillani said that all indications are that buybacks requests will decrease going forward. The Company bought back $489 million of soured mortgages in the second quarter, up nearly 10% from the prior quarter, but still well below the $636 million it repurchased in the fourth quarter of 2011.

Gillani told analysts on the call that Fannie and Freddie have been requesting more files on delinquent loans, instead of foreclosed loans, suggesting that they are working their way through repurchase claims.

"We feel like… the fourth quarter was our peak in terms of total demands and provisions," he said. [With] the trends we're seeing, it looks to us like demands will decline over time."

For the quarter, SunTrust said that its net income rose 54%, to $275 million, from a year earlier. Earnings per share climbed 51%, to 50 cents, 6 cents higher than analysts' estimates, according to Thomson Reuters.

Noninterest income rose 6.4%, after adjustments, to $920 million, partly on a $99 million increase in mortgage production income. SunTrust's loan-loss provision fell 23%, to $300 million, from a year earlier, as net chargeoffs declined 30.7% to $350 million.

Rogers attributed the income gains in part to an 8.4% increase in total loans year-over-year, to $125 billion, fueled by a 12% jump in commercial and industrial loans. The bulk of the growth was in the corporate sector, he said, as small-businesses remain reluctant to borrow.

"It's a tale of two cities: Our pipelines on the commercial side are quite strong," Rogers said. "But … primarily on the small business side there is a lot of uncertainty, from the fiscal cliff to tax to health care, and you see it in the cash build-up."

The results were stronger than those of other regional banks such as PNC Financial Services Group (PNC) and First Horizon National (FHN), which were bitten by higher cost overruns tied to the repurchase of bad mortgages, and KeyCorp (KEY), which reported an increase in its loan-loss provision and announced that it was closing 5% of its branches in an effort to reduce expenses.

Pointing to Key's results, one analyst on the call asked Rogers if SunTrust had any intention of shuttering branches to further reduce overhead. SunTrust has so far resisted efforts to close branches, but Rogers said he would not rule it out.

"We'll be looking at [branch closures] as a consideration long term," he said.

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