A steepening yield curve means short-term pain and long-term gain, executives of SunTrust Banks (STI) in Atlanta cautioned Friday.

"If rates stay at their current levels, it will take a little time before the positive benefits of the steeper curve evidence themselves in the earnings stream," Aleem Gillani, the $172 billion-asset company's chief financial officer, said during a conference call to discuss quarterly results.

Rising rates cut into mortgage refinance activity and reduced SunTrust's accumulated other comprehensive income in the second quarter, Gillani said. Still, SunTrust is looking to redeploy liquidity into higher-yielding instruments as it exits certain investment securities and as mortgages are paid down, he said.

"We are … staying agile and trying to be opportunistic," Gillani said. SunTrust issued 10-year debt early in the second quarter, before rates began creeping up, and it added fixed-rate floating commercial loan swaps after rates increased. "We expect this to aid net interest income in the near term to the tune of about $8 million per quarter," he said.

SunTrust expects its net interest margin to narrow by 5 basis points, more or less, in the third quarter before stabilizing in the fourth quarter, Gillani said.

Net interest income fell 5% in the second quarter from a year earlier, to $1.24 billion. Total loans decreased by 2% from a year earlier, to $122 billion, and the net interest margin compressed by 14 basis points, to 3.25%.

Overall, SunTrust's earnings available to common shareholders rose 35% from a year earlier, to $365 million. However, revenue fell 6.5% from a year earlier, to $2.1 billion.

SunTrust's quarterly results depend largely on its mortgage business, which contributes roughly 6% of total revenue. Mortgage fee revenue fell 33% from a quarter earlier, to $130 million, even though the company had its highest production volume since the third quarter of 2009.

Its mortgage banking segment posted a $76 million net loss in the second quarter, including $339 million in operating expenses. Average mortgage loans fell 11% from a year earlier, to $27.6 billion.

"Our mortgage business was challenged this quarter," William Rogers, the company's chairman and chief executive, said during Friday's conference call. "Lower servicing and gain-on-sale revenue, as well as increased cyclical cost, drove a larger sequential quarter net loss."

SunTrust expects refi volume to abate during the second half of this year, Rogers said.

"Purchased volume … continues to gain momentum, though obviously not nearly enough to offset the expected refi decline," he added. "Considerable opportunity continues to remain across our markets" for purchase activity. "We have targeted strategies to address these opportunities and we are seeing meaningful progress."

SunTrust has also been chipping away at costs tied to its mortgage business by, among other things, outsourcing about 25% of the costs, Rogers said.

Cost control played a major role in the company's overall results. SunTrust reduced headcount by 2,125 employees, or 8%, in the past year, contributing to a 3.3% decline in compensation. Overall, noninterest expenses fell nearly 10% from a year earlier, to $1.4 billion.

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