SunTrust Sheds Light on Problem Loan

The bank lowered its fourth quarter and full-year 2006 earnings to account for a larger loss on a bad loan

SunTrust Banks (STI) said Mar. 1 that it earned less during recent months than originally reported. The Atlanta bank has been struggling in recent years to boost its income from the interest it charges to borrowers. Now SunTrust says it managed in February to clean up a bad commercial loan and that it had to re-account for the loss it took last year on the deal.

SunTrust said Mar. 1 that earnings figures originally reported on Jan. 19 would be reduced because it increased the 2006 fourth-quarter loan-loss provision by $40 million to $116 million. The action reduced EPS for the fourth quarter to $1.39 from the originally reported $1.46, and for all of 2006 to $5.82 from $5.88.

SunTrust had done a deal with a commercial borrower, but the loan hadn't accrued anything such as interest payments since August, 2006. Now in February the borrower sold most of its assets to a third party (who received financing from SunTrust) and thus managed to pay back part of the money owed to SunTrust. The bank took a $69 million loss on the remainder of its exposure to the borrower.

SunTrust said its nonperforming loans declined $131 million from the level reported January 19, 2007, as a result of the definitive agreement and new financing. "The revision to management's estimate subsequent to year end does not constitute a control deficiency," SunTrust said in a press release March 1. "Rather, it is a reflection of the extremely fluid nature of the workout activities associated with this particular loan which have now been essentially concluded."

The news did not have a significant impact on the shares, as the stock rose nearly 0.1% to $84.39 in early afternoon trading on the New York Stock Exchange Mar. 1.

After years of declines in its net interest margin -- which dropped from 3.55% in 2000 to 2.93% in the third quarter of 2006 -- CEO James Wells is under pressure to improve the bank's performance, Morningstar says. "Despite a commendable past and great potential for growth, SunTrust has become a mediocre performer. We have a hard time seeing this bank returning to its former glory," Morningstar analyst Jaime Black said in a note Dec. 12.

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