NEW YORK (
) -- There's quite a difference of opinion about
, which saw its shares drop 8% on Thursday and Friday, after the company on Wednesday reported a solid third quarter.
BB&T of Winston-Salem, N.C., reported third-quarter net income available to common shareholders of $469 million, or 66 cents a share, declining from $510 million, or 72 cents, in the second quarter, but increasing from $366 million, or 52 cents a share, during the third quarter of 2011. The company said that during the third quarter, "earnings were reduced by merger-related charges associated with the acquisition of BankAtlantic totaling $43 million pretax, or $0.04 per diluted common share."
Loan growth was a major highlight for BB&T, with CEO Kelly King saying that "loan growth improved during the quarter as average loans held for investment increased 12.6% on an annualized basis compared to the second quarter including the impact of the BankAtlantic acquisition." Excluding BankAtlantic, "organic loan growth was also strong as average loans increased 8.4% compared to last quarter on an annualized basis," King said, adding that the "growth was led by our other lending subsidiaries, residential mortgage loans, C&I loans and sales finance loans."
BB&T's third-quarter mortgage revenue increased to $211 million, from $182 million the previous quarter, and $123 million a year earlier, following the trend for many large regional banks, as the mortgage refinance wave continues. But the sequential increase in mortgage income was more than offset by a decline in insurance income, to $333 million, from $393 million in the second quarter, although insurance income was up from $241 million a year earlier, factoring-in the company's acquisition of the Crump Group's life, property and casualty businesses in April.
BB&T's third-quarter net interest income was a tax-adjusted $1.52 billion, increasing slightly from the previous quarter, and from $$1.45 billion a year earlier. The company's net interest margin net interest margin (NIM) -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was 3.94%, declining from 3.95% in the second quarter, and 4.09% during the third quarter of 2011.
BB&T's third-quarter return on average assets (ROA) was a solid 1.23%, its return on average common equity was 9.94%, and its return on average tangible stockholders' equity was 17.01%.
Most banks are facing pressure on their net interest margins, with the Federal Reserve keeping its target federal funds rate in a range of zero to 0.25% since the end of 2008, while the central bank in September significantly increased its purchases of
, in an effort to keep long-term rates at historically low levels.
While BB&T's net interest margin (NIM) held up nicely during the second quarter, what seems to have caused the shares to slide on Thursday and Friday was the company's guidance, that the margin would narrow to "the mid-3.70s% range in 4Q12," because of lower rates being earned on new assets, higher long-term debit cost, and the runoff of assets covered by the Federal Deposit Insurance Corp. loss-sharing agreement, covering nonperforming assets acquired when BB&T purchased the failed Colonial Bank of Montgomery, Ala., in 2009.
Following the share price decline, Citigroup analyst Keith Horowitz on Sunday upgraded BB&T to a "Buy" rating, from a neutral rating, although he lowered his price target for the shares to $35 from $36. Horowitz said "We have been on the sidelines with BBT hoping for an entry point as we like BBT's above average profitability and growth, strong balance sheet and risk discipline - all of which make for an attractive long-term investment - but had felt it was
fully valued near-term."
Horowitz added that like
PNC Financial Services Group
, BB&T "is in the sweet spot in terms of regional banks, as it's large enough to get the best expense leverage, but not big enough to be weighed down by large capital requirements, and still has the option to grow via well-priced acquisitions where we believe opportunities will surface over time." The analyst lowered his 2013 earnings estimate for BB&T by 25 cents a share to $3.00, because of the company's guidance on the net interest margin and purchase accounting.
For a quick comparison, PNC's third-quarter ROA was 1.23% and its return on average common equity was 10.15%. PNC's shares closed at $59.42, returning 6% year-to-date, trading for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for nine times the consensus 2013 earnings estimate of $6.69 a share, among analysts polled by Thomson Reuters. Based on a quarterly payout of 40 cents, PNC's shares have a dividend yield of 2.69%.
U.S. Bancorp's third-quarter ROA was 1.70% and its return on average common equity was 16.5%. The Minneapolis lender's shares closed at $34.23 Friday, returning 29% year-to-date and traded for 2.7 times tangible book value, and 11 times the consensus 2013 EPS estimate of $3.07. Based on a quarterly dividend of 19.5 cents, the shares have a yield of 2.28%.
BB&T's shares returned 21% year-to-date, through Friday's close at $29.78, and traded for 1.2 times their reported Sept. 30 tangible book value of $17.02, and for 10 times the consensus 2013 EPS of $2.95. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.69%.
Sterne Agee analyst Todd Hagerman on Monday moved in the opposite direction as Horowitz, downgrading BB&T to "Neutral" from a "Buy" rating, while lowering his price target to $32 from $37, saying that "while the magnitude of margin decline going forward is not expected to equate to 4Q12, modest loan growth and healthy deposit growth will temper the expected ongoing margin pressure. However, expenses are likely to remain elevated as excessive regulatory costs and the planned build-out of the wholesale bank will challenge BBT from generating positive operating leverage."
Hagerman lowered his 2013 EPS estimate for BB&T to by 30 cents to $2.95.
FBR analyst Paul Miller on Monday reiterated his "Market Perform" rating for BB&T, with a price target of $33, and raised his 2013 EPS estimate by a nickel to $2.95, and said that although his target "and implied valuation reflect our view that while BB&T has considerable loan growth, overall earning asset balances will be slower to grow and near-term margin compression will likely offset a majority of this benefit."
Miller also said that "BB&T appears to be the best positioned of the Southeastern regional banks, as it was the only bank among its peers to report positive earnings in each of the last 12-plus quarters without the aid of large reserve releases. However, despite its superior earnings power, we remain cautious on the stock given its relatively high valuation makes shares more prone to weakness as near-term headwinds from low interest rates begin affecting the entire industry."
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Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.