NEW YORK – SunTrust Banks Inc. (STI) on Monday put two senior finance executives on leave after uncovering accounting problems that will result in the No. 7 U.S. bank restating first-half profit higher.
Atlanta-based SunTrust (search) said it found errors in how it accounted for loan losses while preparing its third-quarter results, which it planned to announce Tuesday. The bank said it will delay the results pending an independent audit committee review.
SunTrust put Sandra Jansky, its chief credit officer, and Jorge Arrieta, its controller, on leave pending the review. On a conference call, Chief Executive Phillip Humann said there has been no determination that either acted improperly.
In 1998, in connection with a U.S. Securities and Exchange Commission (search) review, SunTrust restated three years of results higher as it reduced loan loss reserves by $100 million.
"It creates a black eye regarding its reputation," wrote Michael Mayo, an analyst for Prudential equity Group LLC, who has an "underweight" rating on SunTrust. "While the problem this time is not as bad as in late 1998 ... it never looks good to regulators when a problem repeats itself like this."
SunTrust said it expects to increase reported profit by $17.4 million, or 7 cents per share, for the first quarter, and by $4.8 million, or 1 cent per share, for the second quarter. It said further revisions are possible.
"I don't like this," Humann said on the conference call.
But he said SunTrust is "cooperating enthusiastically and fully" with the review, which should not affect overall business. Humann said SunTrust is "determined to understand fully" the errors and take steps "to make sure they never happen again."
SunTrust shares fell 25 cents to $69.53 in afternoon trading on the New York Stock Exchange. They began the year at $71.50.
SunTrust said the expected restatement results from errors in input data used to calculate loan loss allowances relating to the bank's indirect auto loan portfolio. SunTrust is known for its conservative accounting.
"The decision to put a couple of employees in a holding pattern probably more reflects that conservatism than a large accounting problem," said Hilary Hayes, who helps invest $4 billion for Victory Capital Management in New York. "But by increasing profit for 2004, it may cause the growth rate to slow for 2005." Victory sold its SunTrust shares in June.
SunTrust said its audit committee and the law firm Wilmer Cutler Pickering Hale and Dorr LLP will examine the accounting errors, communications between SunTrust personnel and its auditor, loan loss reserves and other matters.
"Though they are revising upward, this is not a positive event because they are moving earnings they might have realized in the future into the past," said Kevin Fitzsimmons, an analyst for Sandler O'Neill & Partners LP in New York. He rates SunTrust a "hold."
SunTrust in August appointed a new chief financial officer, Mark Chancy, who replaced the retiring John Spiegel.
SunTrust had reported profit of $358.5 million, or $1.26 per share, for the first quarter, and $364.8 million, or $1.29 per share, for the second quarter. Analysts polled by Reuters Estimates forecast third-quarter profit of $1.31 per share.
"If you add it all up, it's a big question mark," said Jefferson Harralson, an analyst at Keefe, Bruyette & Woods Inc. in Atlanta. "SunTrust is very conservative, so I'm willing to believe this is an honest mistake that will be cleared up." He rates SunTrust "market perform."
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