SunTrust to restate results of 2 quarters

Bank mistakenly inflated its reserve for loan losses

two officials put on leave

October 12, 2004|By BLOOMBERG NEWS

ATLANTA - SunTrust Banks Inc. said yesterday that it will restate results upward for the first and second quarters of this year because the company mistakenly inflated its reserve for loan losses.

SunTrust, the seventh-largest U.S. bank, said it placed Sandra Jansky, its chief credit officer, and Controller Jorge Arrieta on paid leave pending an accounting review.

Net income will rise by $17.4 million, or 7 cents a share, for the first quarter and by $4.8 million, or 1 cent, for the second.

It's the second time in six years that Chief Executive Officer Phillip Humann has been forced to restate earnings because of errors in determining how much to set aside for bad loans. The mistakes stemmed from data the bank used to calculate a loss allowance in a portfolio of auto loans.

"You prefer not to see errors like that," said Mark Batty, who helps manage $51 billion, including SunTrust shares, at PNC Financial Services Group Inc. in Philadelphia. "You just question how something like this could slip through the cracks. The controls in this reporting area seem to be lacking."

SunTrust found the errors while preparing third-quarter results, which had been scheduled for today and now will be delayed pending an audit committee review.

Humann told investors in a conference call that the company would "take whatever steps are necessary to make sure" errors don't happen again. He said no determination of any improper conduct on the part of the two executives has been made.

"While this is clearly not a positive development for SunTrust, neither is it the end of the world," Humann said. "It has essentially no customer impact. Nor do I think it will have any lingering implications for our strategic priorities or business plans."

Shares of SunTrust fell 78 cents to close at $69 yesterday on the New York Stock Exchange. The shares have fallen 3.5 percent this year.

SunTrust said the audit committee's review could result in additional restatements, including further adjustments to results from the first two quarters of 2004. SunTrust's accounting firm is PricewaterhouseCoopers LLP.

"It creates a black eye regarding its reputation," Prudential Equity Group analyst Michael Mayo, who rates SunTrust shares "underweight," wrote in a report. SunTrust will have less reserves for future loan losses and the restatement might potentially bring investigations by the Securities and Exchange Commission and the Federal Reserve, he said.

Barry Koling, a SunTrust spokesman, declined to comment on whether the bank had been contacted by regulators. John Nester, an SEC spokesman, declined to comment, as did Federal Reserve spokesman David Skidmore.

The bank set aside $917.7 million for bad loans in the first quarter, instead of $942.5 million, and $912.1 million in the second quarter rather than $943.7 million, according to SunTrust.

The bank previously said it earned $358.5 million, or $1.26 a share, in the first quarter this year, and second-quarter earnings were reported as $364.8 million, or $1.29 a share. Analysts expected the bank to report third-quarter earnings of $1.31 a share.

In SunTrust's 1998 restatement, the bank boosted its net income by $61 million for 1994, 1995 and 1996 to correct accounting for loan losses. After discussions with the SEC at the time, it reduced the money it set aside for bad loans by $100 million over the three-year period.

"It's never a good thing when you restate earnings, even upwards," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "It's severe enough that they are putting two senior executives on paid administrative leave and they are postponing earnings."

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