SunTrust Banks Earnings: What You Need to Know

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On Friday, SunTrust Banks (NYSE: STI  ) added its name to a growing list of regional lenders that have accelerated their recovery in the aftermath of the financial crisis.

What you need to know about SunTrust's earnings
The Atlanta-based lender earned $350 million, or $0.65 per share, in the fourth quarter of last year, comfortably beating the $0.61 per share consensus estimate. In the same period a year ago, SunTrust recorded net income of $71 million, or $0.13 per share.

All of the year-over-year growth came courtesy of noninterest income. Mortgage production income grew from a negative $64 million in the third quarter to a positive $241 million last quarter. The large disparity related to lower mortgage repurchase provisions and higher loan production and margins -- click here to see a list of the five largest mortgage originators in the third quarter.

The trend in mortgages is one we've seen at many of the other banks that have reported earnings thus far. Ohio-based regional bank Fifth Third Bancorp grew its residential mortgage portfolio by 13% on a year-over-year basis. In addition, the revenue it derived from mortgage banking grew an impressive 65% over the same time period.

However, no bank has been able to replicate the success of Wells Fargo in this regard. For the three months ended Dec. 31, the California-based bank originated a staggering $125 billion in mortgages. While this was down from the $139 billion that it had underwritten in the third quarter, much of the decline was due to seasonal forces, as fewer people shop for homes in from October through December.

SunTrust's bottom line was also bolstered by a decrease in operating expenses. Among other things, the bank reduced employee compensation and benefits expense by shrinking its full-time equivalent employee count by 1,200 people.

This again is a trend that we're seeing throughout the industry as banks look for ways to maintain profitability in the face of fewer and smaller revenue streams. Of all the banks, Bank of America (NYSE: BAC  ) probably has the most robust expense reduction program. Through the so-called Project New BAC, B of A is seeking to decrease annual expenses by $8 billion. With this in mind, the bank decreased its employee count by 14,000 people last year.

The one negative aspect of SunTrust's earnings concerned its net interest income, which fell both sequentially and compared to the same quarter in 2011. The catalysts for this were twofold. First, the bank reduced its average loan balance. And second, its yield on earning assets came down, exerting downward pressure on its net interest margin. NIM for the fourth quarter was 3.36%, a decline of two basis points from the third quarter and 10 basis points from the fourth quarter of 2011.

Few banks have been able to successfully fight the downward trend in long-term interest rates. Among the banks mentioned above, both Wells Fargo and Fifth Third saw their NIMs fall. One standout in this regard has been Huntington Bancshares (NASDAQ: HBAN  ) , another Ohio-based regional lender that reported earnings yesterday. As I discussed here, its NIM actually increased last quarter due largely to a repositioning of its deposits. On the conference call, moreover, its chief financial officer expressed optimism that the upward trend could continue.

Finally, the still-recovering lender notched important improvements in the quality of its assets. Net charge-offs fell from 1.57% of average loans at the end of 2011 down to 1.3% at the end of last year. In addition, its ratio of nonperforming loans to total loans was nearly sliced in half over the same 12 months, going from 2.37% all the way down to 1.27%.

Foolish bottom line
All things considered, in turn, SunTrust made considerable progress last quarter and appears positioned to build on those gains going forward.

According to the bank's CEO William Rogers: "Favorable performance trends continued, including strong noninterest income and lower expenses, marking another quarter of core earnings expansion. We concluded the year in an even stronger position, driving higher revenue and efficiency gains, while further improving our overall risk profile."

At the same time, however, there remains considerable skepticism about whether shares in SunTrust make for a good investment. A much better option, in my opinion, is Bank of America, which still has considerable upside going forward. In fact, according to our new in-depth report on the nation's second largest bank, our senior banking analyst Anand Chokkavelu believes that it could still "double or triple over the next five years." To learn why Anand thinks this, click here to access his valuable report instantly.

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