SunTrust seeks $1.4 billion more in bailout funds

SunTrust Banks is going back to Uncle Sam, seeking an additional infusion of federal funds.

The Atlanta-based company, which already received a $3.5 billion investment under the U.S. Treasury Department’s Capital Purchase Program, said Tuesday it has received preliminary approval to sell another $1.4 billion in preferred stock to the government.

That would bring the total federal investment in SunTrust to $4.9 billion, the maximum amount the bank is eligible to seek under the government’s $250 billion effort to stabilize the financial industry.

SunTrust’s CEO, James M. Wells III, said the deteriorating economy prompted the bank to build an even greater cushion.

“Given the increasingly uncertain economic outlook, we have concluded that further augmenting our capital at this point is a prudent step, especially if the current recession proves to be longer and more severe than previously expected,” Wells said in a news release.

Politicians have pressed banks to use the federal funds to boost lending, a move that could help kick-start the sputtering economy. But few strings are attached to the money.

SunTrust has previously said it would seek to make prudent loans but also use the funds to shore up its capital base and possibly buy other banks.

Chris Marinac, a banking analyst at Atlanta-based FIG Partners, said he expected SunTrust to use the money first to write off bad loans, second to make acquisitions, and third to make new loans. Marinac said he expected SunTrust to “be very aggressive” in writing down assets during the fourth quarter.

“No one’s expecting them to do anything other than get rid of loan problems,” he said. “There should be some heavy loss recognition. That’s what investors are craving right now.”

However, investors did not appear excited by the transaction. SunTrust’s stock price dropped 11 percent on Tuesday, to $30.04, on a day the Dow Jones average fell 2.7 percent and other regional bank stocks swooned.

Despite the recession, SunTrust has remained profitable. Last quarter, the company reported $306 million in earnings, results that included the sale of Cocal-Cola stock.

In the news release, Wells said the bank understands the importance lending holds in stabilizing the economy.

“This additional capital will enhance our capacity to continue to make good loans to qualified borrowers, work with homeowners, and pursue other opportunities that support economic stability, even as we manage through this difficult industry environment,” Wells said.

Brian Olasov, managing director of the finance department at the McKenna Long & Aldridge law firm, said the federal program is providing banks with a relatively inexpensive way of raising capital. SunTrust must pay 5 percent returns on the funds for the first five years, much lower returns than would be demanded by investors in a more typical stock offering.

“Under the capital purchase terms, this is very attractive money,” said Olasov, who is also an adjunct professor at Emory Law School. “It generates a number of additional investment opportunities for the institution to take advantage of.”

Still, Olasov said he didn’t expect SunTrust to undertake a significant amount of new lending at this time, given the tough economic times that have dampened demand for new loans and increased risk.

SunTrust “has to very carefully consider where they’re lending money in this environment,” he said.