SunTrust Banks (STI) unveiled several major balance-sheet moves Thursday, including the final disposition of its longtime holdings in Coca-Cola (KO) and a $375 million provision for mortgage-repurchase losses.
Overall the changes will result in a net gain of $750 million, or $1.40 per share, and a "modest" increase in Tier 1 common equity in the third quarter, the Atlanta company said after the markets closed.
The complex series of moves — which include writing off $3 billion of bad loans and the sale of about $200 million of affordable housing investments — involve issues that had been looming over SunTrust executives for years.
"These actions better position SunTrust for the future by further improving our risk profile and strengthening our balance sheet while keeping regulatory capital ratios stable," William H. Rogers Jr., SunTrust chairman and chief executive, said in a news release. "Furthermore, the steps we are taking add to the momentum SunTrust has been building, with consistently improving financial trends, and progress in many of our markets."
SunTrust will record a $1.9 billion pretax gain in the third quarter from the accelerated sale of 59 million of its 60 million shares in Coke. SunTrust's annual net interest income will decline by roughly $40 million from the loss of dividends from the Coke stock. But the price of keeping the shares into 2015 as planned would have been worse under the proposed Basel III capital rules and the Federal Reserve stress test's requirements for equity holdings, executives told analysts in a conference call after the announcement.
SunTrust failed the stress test earlier this year after its Tier 1 capital ratio fell below the minimum requirement. Last month the Fed approved SunTrust's revised capital plan — which did not include increasing its dividend from five cents per share or repurchasing shares this year.
SunTrust will give its remaining 1 million Coke shares, valued at roughly $37 million, to the SunTrust Foundation. SunTrust in recent years had started unloading millions of shares of Coke stock, which it had collected since 1919, to raise capital.
SunTrust also said it will add $375 million to its provisions for mortgage-repurchase losses. Most of the provision relates to loans sold to government sponsored enterprises before 2009, and that it decided on the increase after discussions with officials at Fannie Mae and Freddie Mac. Its past losses on such loans and its reserves total $2.1 billion, the company said.
This quarter SunTrust also will transfer roughly $3 billion of loans to loans held for sale. These include nonperforming mortgage loans, nonperforming commercial real estate loans, delinquent Ginnie Mae loans and delinquent and current student loans. It expects to incur pretax charges of roughly $250 million. The majority of the writedown is expected to be associated with the nonperforming loans and will be recorded as a net chargeoff, while the portion pertaining to the sale of delinquent loans will reduce noninterest income.
SunTrust expects the sales will lower its nonperforming and delinquent loans and improve its risk profile. The loans are expected to be unloaded in the third and fourth quarters.
Finally, SunTrust will begin marketing for sale roughly $200 million of the properties in its affordable housing subsidiary, Transom Development. It expects to record a pretax writedown of roughly $100 million from the move. The ongoing financial impact associated with the potential sale of these assets is not expected to be material to its performance, SunTrust said.