SunTrust Banks Inc. broke ranks Thursday, emerging as one of the first regional banking companies in the Southeast to acknowledge cracks forming in its commercial book.

It listed corporate banking as one of the primary drivers for higher credit costs that helped put the company in the red for the second straight quarter. During a conference call to discuss the first-quarter results, executives warned of growing signs that the recession is pressing its middle-market clients.

James Wells 3rd, SunTrust's chairman and chief executive, said during the call his company was "seeing some weakness in our commercial client base" while it caught "preliminary signs of improvement" in its mortgage portfolio. "While we know recovery will be forthcoming, we're not looking for things to turn around quickly."

Mark Chancy, SunTrust's chief financial officer, gave evidence that fissures had formed in the $38.6 billion commercial portfolio, including a 5.9% reduction in that book from a quarter earlier as utilization among midsize and large corporate clients fell 2%.

"Inventories are being reduced, and investments are being delayed or canceled due to the economic environment," he said.

The foreboding tone followed more upbeat outlooks from some regional competitors. BB&T Corp. of Winston-Salem, N.C., raised no major red flags in commercial lending when it reported earnings last week. William Wells, Regions Financial Corp.'s chief risk officer, took an even more defined stance during the Birmingham, Ala., company's conference call Tuesday. "Even though we start to look at what unemployment may do, we have not seen it come through our portfolio yet," he said. "Remember, now, we've been talking about contagion for almost a year now, and we just have not seen it."

Credit quality weighed heavily on SunTrust's results. Nonperforming assets rose 17.7% from a quarter earlier, to $5.25 billion, led by a 25.6% increase in commercial real estate and a 24.3% spike in commercial loans. The nonperformers climbed 129% from a year earlier.

Net chargeoffs climbed 10.4% from the fourth quarter and doubled from a year earlier, to $610.1 million.

The $179.1 billion-asset Atlanta company responded by increasing its loan-loss provision 3.3% from the fourth quarter and 77.5% from a year earlier, to $994.1 million.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said SunTrust may be "coming to grips" with inevitable commercial deterioration quicker than its competitors, though he also said the company clearly has more exposure to large clients in Atlanta.

"It seems logical that you would see issues pop up" at SunTrust, he said. "Most companies enjoyed a breather quarter this time after taking fourth-quarter hits. Maybe some feel they have a handle on construction, but things haven't gotten dramatically worse elsewhere."

Despite the increase in its provision, SunTrust's allowance would cover just 52% of its nonperforming loans. Regions, in comparison, has an allowance equal to 113% of its nonperformers.

Frank Barkocy, the director of research at Mendon Capital Advisors, said he is not overly concerned about the low coverage at SunTrust, particularly if issues are shifting to commercial from housing.

"They should get better recovery off of C&I, because the value of the collateral should be worth more," he said. "Another encouraging sign at SunTrust is that their early-stage delinquencies are showing signs of diminution."

Unlike others in banking, SunTrust did not return to profitability, though the bulk of its $815.2 million first-quarter loss involved a goodwill impairment charge similar to what many others took a quarter earlier. Excluding the charge, it lost $91.3 million, or 46 cents a share, which beat the average analyst estimate by 21 cents.

Despite the loss, SunTrust managed to boost capital levels by reducing assets 5% from a quarter earlier. It unloaded $6 billion of mortgage-backed securities and $3 billion of trading securities. The tangible common equity ratio rose 23 basis points, to 5.82%.

Mortgage production was a bright spot for SunTrust, as it has been for other firms this quarter. Originations jumped 86% from the fourth quarter and 14.6% from a year earlier, to $13.4 billion.

Though a rarity among large regionals, SunTrust is not the only banking company to report issues developing beyond housing. Synovus Financial Corp. in Columbus, Ga., reported its third straight quarterly loss and said late Wednesday that it was working through a $220 million loan to a resort company that it moved to nonaccrual status in the fourth quarter. Two other companies, which Synovus did not name, were involved with the loan.

Frederick Green 3rd, the $34.5 billion-asset Synovus' president and chief operating officer, said it has developed a plan to restructure the loan that would include the sale of nonoperating assets.

"We are the lead bank on this particular one, and we have worked out … a structure that we think is beneficial to us and allows the company to execute on its plan," he said.

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