SunTrust: Consider This 'Southern Gem' Of Regional Banking
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SunTrust Banks (NYSE: STI) recently released second quarter earnings, and it was quite a success by recent standards, if not by historical benchmarks. This leading southern bank had a higher exposure to horrid real estate conditions last decade in Georgia and especially South Florida than any other bank. With few exceptions, it fell harder from its 2006-2007 highs more than any other bank. It is slowly but surely rebuilding, and this quarter was a sign that the hard work and patience are working.
Earnings came to $270 million, a 55% advance from the second quarter of 2011's $174 million. Roughly seventy million of that came due to the bank no longer having to pay interest on its TARP loans that it finally paid back last year. The earnings came to $0.50 per share, a 52% advance from last year's $0.33 per share. SunTrust has more than doubled its income through the first six months of this year versus last year, from $0.41 per share a year ago to $0.96 this year. The second quarter also beat analysts' expectations, which were a mean of $0.44 per share. The second quarter results came to a return on assets of 0.62%, and SunTrust's efficiency ratio in the quarter was 68.3%. Obviously, there is much room for improvement.
A lot of things went right in the quarter. For instance, going into the second quarter SunTrust had reported four consecutive quarters of revenue drops. Finally, that trend has been broken. Revenues came to $2.25 billion, a 2.2% gain from the somewhat depressed level of a year ago. One cannot be certain, but I do expect this to be the start of several quarters of revenue growth. The loan portfolio grew by nearly $10 billion, or 8% from the year earlier, up to $124.6 billion. But due to a flattening yield curve, interest revenue fell, as did credit costs. Net interest income of $1.306 billion was up just 1.6%, or $20 million from a year earlier. The flattening of the yield curve is evidenced by its net interest margin. The average yield of the loan portfolio fell 40 basis points over the last year, and, while partially offset by lower yields on corporate debt and deposits, the net interest margin fell 14 basis points over the course of the year to 3.39%, below the average of the larger banks.
Non-interest income also rose by about 3% to $940 million, climbing by $28 million from the second quarter of 2012. Most of the advance was due to mortgage production fee income, which rose from $4 million in the second quarter of 2011 to $103 million in the recent quarter. Non-interest expense was nearly flat versus the year earlier to $1.546 billion.
SunTrust is still reserving fairly aggressively. The reserve provision fell 24% from the year earlier, or by $92 million, but the $300 million set aside is still substantial given the size of the loan portfolio. Suntrust also is being adversely impacted by agency claims from Fannie Mae (FNMA) and the like for mortgage repurchases, principally from the years 2008 and before. At the end of the second quarter, its reserve for mortgage repurchase losses was $434 million, up $51 million from the year earlier. Time will tell if that special reserve fund will be adequate, or whether government agencies will find other ways to stick banks with even more claims.
SunTrust came into being upon the merger of a large Georgia bank with a large Florida bank, and though there has been a string of acquisitions since, the bulk of the bank's assets remain in those states. SunTrust has the third largest market share in Florida, a huge market dominated by Bank of America (NYSE: BAC). Bank of America, in its current mode, is not accepting mortgage loans from third party correspondent brokers and banks; all its mortgages must originate in house. The real estate community is not going to look kindly upon that, and that opens up the market considerably for Suntrust. Suntrust is the largest bank in Georgia. I am convinced as the real estate market normalizes, Georgia and especially Florida will renew their historical economic growth, and SunTrust will benefit from that.
Even with Bank of America pretty much out of the picture, there are many banks with large presences in the Southeast that compete for limited customers with SunTrust. BB&T's (NYSE: BBT) footprint nearly overlaps SunTrust, and this conservatively run bank has not had the sort or trauma SunTrust did late last decade because of that conservatism. It had a spectacular second quarter, as net interest revenue was up 8%, and non-interest income was up 23%. Add in a $50 million drop in loan reserve provisions, and net income grew to $510 million, a 66% improvement from the previous year. Earnings per share of $0.72 represented a 64% improvement. The profit represented a 1.22% return on assets, no small feat as assets grew some $20 billion to $178 billion. The efficiency ratio was a stellar 53.9%. If you can stomach management's outspoken political beliefs, this might make a superb long-term holding for conservative investors.
Regions Financial (NYSE: RF) is another large, southern regional bank that nearly fell to bankruptcy late last decade, so severe was its loan loss problem. It issued a $900 million dilution of its common stock and sold off its Morgan Keegan Brokerage to finally pay back its TARP debt, becoming the last of the largest twenty commercial banks in the country to do so. It has not as yet reported earnings for the second quarter as I write this, but I am expecting about $0.15 per share, which would more than triple the second quarter of last year's performance. Much of those earnings will come from lowered reserve provisions, no doubt. But I am giving this long distressed bank some time to breathe before becoming concerned about its ever shrinking loan portfolio. I will report more fully after earnings are released. I like Regions as a speculative turn around candidate over the three to five year time horizon.
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