If you haven't been following Atlanta-based super-regional bank SunTrust (NYSE:STI) much in the last year, don't worry -- you haven't missed much. With a notable exception back in October, this stock has pretty much stayed locked between $70 and $75 a share since late 2004. Of course, during that time the bank has continued to grow, so it's fair to wonder whether it has grown into being more of a value of late.
While first-quarter results weren't bad, they continue to reflect some of the challenges and changes with SunTrust's business. Net income climbed 8% as net interest income rose about 6% on a 3.1% net interest margin that was flat compared with the previous quarter and non-interest income that rose 13% (or 15% excluding other gains/losses). Of note, many of the more traditional non-interest income varieties posted rather unimpressive gains (1% in service charges and 2% in trust/investment fees), and much of the growth came from mortgage-related items.
Turning to the balance sheet, loan growth was a nice 13%, but once again commercial lending (historically a fairly important business here) was very weak, and the growth came from mortgage lending and lending tied to home construction. On the deposit side, total average deposits rose 5%, but low-cost deposits declined 5% and there was a nearly 84% jump in brokered deposits.
It's this change in business and balance sheet mix that still concerns me a bit. While I'd really like to see better commercial loan growth, I can understand why SunTrust wants to do more real estate lending -- the Southeast is still experiencing a population boom and there's money to be made here. On the other hand, I wish the company could find cheaper sources of funds -- while brokered deposits are cheaper than the loans it's making, they're still some 80% more expensive (in terms of average yield) than the more traditional deposit base.
All that said, I do wonder whether today's valuation doesn't overcompensate for all of this. True, this bank has the worst return on assets and equity compared with its larger Southeastern peers (Wachovia (NYSE:WB), Bank of America (NYSE:BAC), and BB&T (NYSE:BBT)), but even still, the differences aren't that great. I'm not wholly convinced that SunTrust's changing approach is all for the better, but the stock may yet be looking like a bargain at today's levels.
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Fool contributor Stephen Simpson owns shares of BB&T, but no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).
