By Andrew R. Johnson and Ben Fox Rubin
A slew of mortgage issues hammered SunTrust Banks Inc.'s (>> SunTrust Banks, Inc.) third-quarter earnings, as the Atlanta lender agreed to shell out more than $1 billion to end several legal issues while grappling with a slump in loan refinancing that has slammed the banking industry.
SunTrust said Friday its profit fell 82% from a year earlier as expenses related to settlements reached with government agencies over the bank's mortgage origination and servicing activities ate into the results. Mortgage income was also pressured as originations fell due to rising interest rates, which has caused a slowdown in refinancing activity.
The company reported a profit of $189 million, down from $1.08 billion a year before. Per-share earnings, which reflect the payment of preferred dividends, were 33 cents compared with $1.98 the year before.
Last year, the company posted a gain of about $1.9 billion related to the sale of Coca-Cola Co. (>> The Coca-Cola Company) stock. Excluding the mortgage-settlement costs and stock-sales gains from a year earlier, earnings were 66 cents, up from 58 cents.
Revenue, excluding securities gains, rose 0.9% from the year before to $1.92 billion.
Analysts polled by Thomson Reuters recently expected earnings of 69 cents a share on $2.07 billion in revenue.
Like other banks, SunTrust has operated under a cloud of regulatory scrutiny tied to mortgage practices during the financial crisis, including lenders' handling of foreclosures and interactions with borrowers in distress.
To resolve many of those issues, SunTrust earlier this announced agreements with Justice Department, Department of Housing and Urban Development and Federal Reserve under which it will pay more than $1 billion to settle various probes.
The settlements drove up expenses by $323 million in the third quarter.
SunTrust also said it would pay more than $200 million to government-controlled mortgage firms Freddie Mac (>> Federal Home Loan Mortgage Corp) and Fannie Mae (>> Federal National Mortgage Association) to resolve so-called repurchase requests. Freddie and Fannie buy mortgages from lenders, providing them with a guarantee against future losses. But they can force lenders to buy back mortgages that don't adhere to the firms' underwriting standards.
"Resolving these legacy mortgage matters allows us to focus our efforts on the considerable opportunities that exist in all of our businesses as we concentrate on meeting more clients' needs," William Rogers Jr., chairman and chief executive officer of SunTrust, said in a statement.
For the quarter, the bank's net interest margin, a measure of lending profitability, narrowed to 3.19% from 3.38% a year earlier and 3.25% in the second quarter.
The provision for credit losses was $95 million in the quarter, down from $450 million a year earlier and $146 million in the prior quarter.
The company has been cutting costs to offset slow loan growth and low interest rates. However, noninterest expense was up 1% from a year before to $1.74 billion, due in part to the mortgage settlements.
SunTrust reported a plunge in mortgage-production income, which fell to a loss of $10 million compared with $133 million of income in the second quarter due to lower originations and sale margins. The results were improved from a loss of $64 million a year earlier, though, as it set aside less money for mortgage-repurchase requests.
A slowdown in mortgage refinancing due to rising interest rates in the last several months has put added pressure on banks to cut costs.
SunTrust earlier this week said it was slashing 800 mortgage jobs due to a slowdown in mortgage activity. Wells Fargo & Co. (>> Wells Fargo & Co), the nation's largest home lender, said Wednesday it was laying off 925 employees, bringing its total number of mortgage job cuts to about 6,200 since July.
Citigroup Inc. (C), Bank of America Corp. (>> Bank of America Corp) and J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co.) have also announced thousands of layoffs this year.
SunTrust's shares closed up 0.6% at $34.03 on Thursday and were inactive in recent premarket trading Friday. The stock has risen 20% so far this year.
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