The third quarter of last year was to be the "kitchen sink" quarter -- meaning most of the bad news for banks was behind them.

It wasn't.

Then some banks hinted, and a few Wall Street analysts thought, the fourth quarter would be the industry's rock bottom.

It wasn't.

Like other banks reporting lower first quarter profits this week, SunTrust Banks, which released its numbers Tuesday, continued to suffer from a bad housing market and ongoing devaluation of some asset-backed securities.

The Atlanta-based institution said profits fell 44 percent -- despite some growth in its core business lines -- to $283.6 million, or 81 cents per share, compared with $513.9 million or, $1.44, in the year-ago quarter.

The falling values of some asset-backed securities, such as pools of consumer mortgages and home equity lines of credit, were a large part of that profit drop. The after-tax impact was $101.5 million, or 29 cents per share.

Excluding that loss, SunTrust would have exceeded Wall Street's expectations of $1.02 per share. The company's stock closed at $52.60 per share, up 30 cents.

James M. Wells III, SunTrust's president and chief executive, told analysts in a conference call that the company was hurt by the "challenging" earnings environment but could overcome it.

"In the first quarter, growth and (loan-loss) provision expense associated with the residential real estate correction took a toll on results," Wells said. "However, SunTrust remains a financially strong institution with significant growth opportunities."

Key to helping the bank in the quarter was growth, even if modest, in deposits and loan activity. Non-interest income, such as account fees, also rose a healthy 20 percent and SunTrust managed to keep expenses in check.

But the economy continues to struggle and the bank boosted its loan-loss provision ten times to $560 million, which covered $297 million in bad loans.

Investors shouldn't count on a major turnaround for the general economy anytime soon, one expert said.

"The retail investor has to realize that this is a business cycle and cycles take time to unfold," said Christopher W. Marinac, a banking analyst with FIG Partners in Atlanta. "I hope the stabilization comes as quickly as SunTrust says it may, but there's a very good possibility that we may still be talking about these issues until 2009.

"The challenge for SunTrust is to convince investors that their losses don't get any worse than this."

SunTrust is expected to add a cushion from the planned sale of its massive Coca-Cola Co. stock holdings by the end of this quarter. The anticipated move could add as much as $1 billion to the bank's Tier 1 capital base. Tier 1 capital is the value of a bank's stock plus retained earnings and has to be at least four percent of total risk-weighted assets.

SunTrust raised boosted its Tier 1 ratio to 7.25 percent in the quarter, up from 6.93 percent in the last three months of last year. The bank has a target ratio of 7.5 percent, but Marinac said other institutions have much better ratios.

And even though the bank has the reputation for being a conservative lender and historically hasn't done as poorly as its peers in previous downturns, that's not necessarily the case this time around.

A FIG analysis of the nation's biggest banks shows problem loans at the top 50 institutions averaged 1.1 percent of total loans. At SunTrust, bad loans were 1.9 percent of total loans.

Marinac said SunTrust is trying to argue that it's outperforming its peers. "But statistically, it's not true and therein lies the challenge."

Wells said the bank isn't kidding itself about the earnings results, but he maintained SunTrust is prepared should the economy worsen.

"We obviously are not pleased with our credit performance and the impact on near-term earnings," Wells said. "While I believe the Federal Reserve is being quite responsive to the difficult environment, it does appear to me that the economy is going to be weak in the short term and this weakness could possibly extend into 2009. While we all certainly hope for one of the better economic scenarios to unfold, we are prepared for the alternatives."