Credit quality concerns continued to mount Tuesday when SunTrust Banks Inc. reported unexpectedly high third-quarter nonperforming assets as a result of its exposure to four large syndicated loans.
Third-quarter profits rose 1.6% from the same period last year, to $326.8 million, but executives of the Atlanta company said they were caught off guard by nonperforming assets, up 32% from the second quarter.
However, the combined effects of cost savings, lower taxes, and a share buyback program helped SunTrust post per-share earnings of $1.11, a penny above Wall Street's expectations but excluding merger-related charges.
Third-quarter net income at Firstar Corp. of Milwaukee rose nearly 10-fold, to $308.9 million, which included $102 million of merger-related charges. Without the charges, per-share earnings of 39 cents met the analyst consensus estimate.
Firstar also reported rising nonperforming assets as a result of its participation in the syndicated loan market.
SunTrust and Firstar were the first of the 25 largest U.S. commercial banking companies to report for the quarter, and analysts said SunTrust's results could portend some problems ahead. Indeed, the market appeared spooked Tuesday, as shares of several large commercial banks, particularly those based in the Southeast, dropped. (See story, back page.)
Much attention was paid this summer to the syndicated lending activities of regional banks after Wachovia Corp., considered one of the most conservatively run companies, reported a big exposure to a troubled credit in the second quarter.
Nancy Bush, an analyst at Prudential Securities, said SunTrust's results appeared to have been particularly rattling this time around. "It's like Wachovia II."
SUNTRUST BANKS INC.
"We have mixed emotions," said Philip Humann, chairman and chief operating officer, during a morning conference call with analysts.
Corporate banking showed strength, as did lending, he said. But the company said it has still been unable to return its trust operations to comfortably profitable levels. "We are still very disappointed with the results in trust," Mr. Humann said.
SunTrust continued to feel the squeeze of rising interest rates, exacerbated by strong loan growth that has not been matched by growth in cheap deposits. The net interest margin shrank to 3.47% from 3.55% in the second quarter and 3.87% in the third quarter last year.
Loans rose 14% from last year, to $71.5 billion.
Net interest income fell 1%, to $740 million. Fee income was flat at $447 million as income from trust declined 3.6%, to $121 million. The company attributed the problem to a flight by investors from higher-fee equity products to lower-fee fixed income and money market products.
SunTrust has struggled with its trust business over the past year, as droves of customer have defected from its funds because of poor performance. The company said that it is winning new business - it called September a stellar month - but that progress still needed to be made.
Eugene Putnam, director of investor relations at SunTrust, said that trust fees "clearly were not the highlight" of the quarter.
Fees from corporate and institutional services rose 173%, to $35 million.
SunTrust attributed the rise in nonperforming assets to four syndicated credits - a $45 million exposure to a loan to the movie theater operator Carmike, a $10 million exposure to the furniture retailer Heiligmeyers, a $26 million exposure to an unidentified health care-related company, and a $10 million exposure to an unnamed textile firm.
"We believe in this environment nonperforming loans will continue to rise, although not at the level we saw in this quarter," Mr. Putnam said.
Expenses rose 2%, to $706 million, held down by a 2% decline in personnel costs. SunTrust said that it eliminated 1,100 jobs, or 3.7% of its employee base, during the quarter by not replacing back-office support personnel who left, and that hiring freezes in certain high-turnover areas are still in place.
The company, which just last Wednesday agreed to acquire U.S. Bancorp of Minneapolis, is the product of recent mergers with Mercantile Bancorp of St. Louis and Star Banc Corp. of Cincinnati.
On Tuesday, Firstar said it had increased the merger-related charges for its two previous deals 7.07%, to $985 million.
Firstar has struggled less than SunTrust with the effects of rising interest rates. Indeed, its third-quarter net interest income rose 2.2%, to $689.7 million. Fee income rose 9.7%, to $431.6 million, led by a 24% gain in credit card fees, to $35 million. Fees from retail deposits rose 14.8%, to $56 million, and fees from trust operations rose 5%, to $111.1 million.
Nonperforming loans rose 20% from the second quarter, to $277.2 million. The company attributed about $29 million of the increase to its participation in several large syndicated credits.
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