BB&T Corporation’s (BBT) third quarter 2010 adjusted earnings came in at 31 cents, a nickel ahead of the Zacks Consensus Estimate of 26 cents. Adjusted earnings for the reported quarter leave out merger-related charges of one cent per share.
Considering this non-recurring item, earnings per share for the reported quarter were 30 cents compared with 23 cents in the year-ago quarter.
Higher mortgage banking income, checkcard fees, non-deposit fees and commissions and improved net interest income primarily contributed to the better-than-expected results. Substantial increase in securities gains were also among the earnings drivers. However, higher provision for credit losses, lower service charges on deposits and increased non-interest expense were the downside.
Quarter in Detail
GAAP net income available to common shareholders for the reported quarter was $210 million, up 38% from $152 million in the prior quarter.
Total revenue of $2.9 billion surpassed the Zacks Consensus Estimate of $2.3 billion. Revenue for the reported quarter also increased 7% from $2.7 billion in the year-ago quarter.
Tax-equivalent net interest income for the quarter was $1.3 billion, up 6% from the prior-year quarter. Tax-equivalent net interest margin (NIM) was 4.09%, up 41 basis points (bps) from the prior-year quarter. The improvement in NIM was driven primarily by loans purchased from legacy Colonial and lower deposit costs.
Non-interest income inched up 18% year over year to $1.1 billion. The increase was primarily due to a $208 million increase in securities gains and a $40 million increase in mortgage banking income. However, these increases were partially offset by an 18% decrease in service charges on deposits.
Non-interest expense upped 7% from the prior-year quarter to $1.4 billion. Higher non-interest expense for the reported quarter included $49 million of additional expenses related to foreclosed properties, a $16 million increase in professional services costs, $15 million in loan processing expense and $17 million in higher regulatory charges. These increases were partially offset by a 44% decline in merger-related and restructuring charges and a 4% decline in other expenses.
Credit Quality
Credit metrics showed mixed performance during the quarter. Provision for credit losses was $770 million, up 9% from $709 million in the year-ago quarter. Allowance for loan and lease losses as a percentage of loans held for investment was 2.56% as of September 30, 2010 compared with 2.66% as of June 30, 2010 and 2.29% as of September 30, 2009.
Net charge-offs were 3.31% of average loans and leases, up from 2.48% in the prior quarter and 1.71% in the year-ago quarter.
Non-performing assets as a percentage of total assets decreased to 2.81% from 2.90% as of June 30, 2010 but increased from 2.48% as of September 30, 2009.
Profitability and Capital Ratios
Profitability metrics improved during the quarter, with return on average assets and return on average equity rising to 0.56% and 4.91%, compared with 0.40% and 3.90%, respectively, at end of the prior-year quarter. Also, book value per share improved to $24.11 from $24.07 in the prior quarter and $23.41 in the year-ago quarter.
Leverage ratio was 9.3% as of September 30, 2010, up from 8.9% in the prior quarter and 8.5% in the prior-year quarter. In addition, BB&T’s Tier 1 risk-based capital and total risk-based capital ratios were 11.7% and 15.7%, respectively, up from 11.1% and 15.6%, respectively, as of September 30, 2009. BB&T’s risk-based capital ratios remained well above the regulatory standards of well-capitalized banks.
BB&T is growing organically and through acquisitions, while also posing a sufficient capital reserve. A gradual improvement in loans and deposits should also make the financials attractive. However, challenges related to the near-term impact of the financial reform and pressure on credit quality raise concerns on growth.
BB&T currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the company’s weak fundamentals, we have a long-term Underperform recommendation on the stock.
BB&T shares were up about 0.4% in before-market trading following the announcement of third quarter results.
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