Mortgage Issues Lurk at SunTrust

SunTrust Banks Inc. beat expectations for fourth-quarter earnings on stronger lending, but mortgage-repurchase costs and a drop in debit-card fees overshadowed the good news.

Net income available to common shareholders rose 33% from a year earlier, to $152 million, or 28 cents per share. The figure was a penny higher than the average of analysts polled by Thomson Reuters. The profit, however, was less than the $211 million posted in the third quarter of 2011.

Profit might have been better for the Atlanta company if not for two hits to noninterest income. The biggest hit was being forced to increase the size of its mortgage-purchase provision — to about $215 million — to cover repurchase requests. That was a $98 million increase over its provision for the third quarter. SunTrust also increased its reserves for mortgage repurchases to $320 million, a $38 million rise from the third quarter.

The second hit was the federal law capping interchange fees for banks, which became effective in the quarter, reducing SunTrust's fee income by about $50 million.

Overall, noninterest income, excluding adjustments for things like mortgage-servicing costs and securities gains, fell 30% from a year earlier, to $723 million.

Chief Executive Bill Rogers and Chief Financial Officer Aleem Gillani went into great detail during a Friday morning conference call to explain the mortgage-repurchase request situation. SunTrust received $636 million in repurchase demands in the quarter, predominantly tied to Fannie Mae loans from 2007.

Rogers had warned last month that costs associated with repurchasing mortgage loans would be higher. Fannie and Freddie Mac are increasingly demanding that lenders buy back loans made during the housing boom and later packaged into securities that they claim did not comply with their standards for acquiring loans.

The jump in repurchase demands is expected to continue to cause pain in the next couple of quarters, but Gilllani said that executives expect the impact to earnings should begin to abate starting in the third quarter.

Part of the problem is $177 billion-asset SunTrust's exposure to the scarred Florida real estate market. In response to a question by Morgan Keegan analyst Bob Patten, Rogers said the situation in Florida should eventually improve as the "economy normalizes," though he declined to provide the exact number of homes in Florida at issue.

"Property taxes are higher in Florida and it's a judicial foreclosure state, so we're stuck with a multihundred-million dollar portfolio," Rogers said.

SunTrust also warned that it may take a charge related to a potential legal settlement on mortgage servicing. SunTrust is one of nine banks approached by the U.S. Justice Department to join a settlement of allegations of misconduct related to foreclosures, rather than face potential government lawsuits.

Average performing loans grew 5% from a year earlier, to $116.4 billion, as growth in commercial-and-industrial lending and student loans offset a decline in residential, construction and commercial real estate lending.

Rogers was upbeat on the rate of progress that SunTrust is making on its $300 million cost-cutting program. Still "relatively early in the process," SunTrust had achieved about $75 million in savings through the end of 2011. The ultimate goal is to reach $300 million in savings by 2013. SunTrust is cutting costs by renegotiating with vendors, consolidating units, and lowering headcount in branches through attrition. Rogers did not provide a specific number of jobs that have been cut.