SunTrust Banks Inc. will restate its earnings for the first two quarters of the year after discovering errors in how it sets aside money to cover problem loans.
The Atlanta-based bank said yesterday it had put two officers on paid leave until it can conduct an internal investigation of the error. The restatement will result in an increase in net income for the first half of 2004.
"While this clearly is not a positive development for SunTrust, neither is it the end of the world," chief executive L. Phillip Humann said in a conference call. SunTrust, usually among the first large banks in the country to report earnings, will delay releasing its third-quarter results until its investigation is complete.
SunTrust has more than 170 branches in the Washington area and has the third-largest market share here, behind Wachovia and Bank of America. The company has more than 1,200 branches total in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia and D.C.
SunTrust discovered the problem while preparing its third-quarter results. It determined that its loan loss reserves -- money banks set aside to absorb possible bad loans in the future -- were overstated by $24.8 million in the first quarter and $6.8 million in the second quarter. Loan loss reserves are taken directly from pretax income, so the reversals of the reserves will go directly to the bottom line.
SunTrust chief financial officer Mark A. Chancy said the error occurred in the inputs fed into a new system to determine loan loss reserves. SunTrust, he said, entered gross charge-offs -- the total amount of loans written off as uncollectible -- instead of net charge-offs. Net charge-offs are derived by subtracting recoveries of a previously charged-off loan from gross charge-offs. The result was that the loan loss reserve, which is based in part on past loan charge-off performance, was overstated.
The company had a similar restatement in 1998, when the Securities and Exchange Commission argued that SunTrust had over-reserved in 1994, 1995 and 1996. At the time, the SEC had conducted reviews of several major banks to determine whether they were over-reserving to help manage net income. The 1998 restatement covering the three-year period did not result in any formal enforcement action against SunTrust.
Humann said chief credit officer Sandra W. Jansky and controller Jorge Arrieta were put on paid leave until the board's audit committee finishes its review. He did not give a time line for completing the review. Humann said "no final determination of any improper conduct has been made" with respect to the two officers. The company declined to comment beyond its written statement and the brief remarks by Humann and Chancy on the conference call.
Sandler O'Neill & Partners analyst Kevin Fitzsimmons said that for now he considers the restatement a one-time event, but that the accounting errors will becloud the company until a full explanation is given.
"The good news is this seems an isolated, kind-of-stupid mistake," he said. "The bad news is it's an isolated, stupid mistake that got by management's attention for a few quarters. Setting loan loss reserves is supposed to be a core competency of a bank like this."
The accounting errors will likely draw the attention of both bank regulators and the SEC, Fitzsimmons said. "The fact that you have an ongoing review means that other things could be found, possibly," he said.