BB&T's Earnings Rise on Lower Credit Costs

NEW YORK ( TheStreet) -- BB&T ( BBT) on Thursday reported earnings that came in ahead of expectations, as the company's credit costs declined.

The Winston-Salem, N.C., lender reported fourth-quarter net income available to common shareholders of $537 million, or 75 cents a share, beating the consensus EPS estimate of 71 cents, among analysts polled by Thomson Reuters.

Earnings increased from $268 million, or 37 cents a share, during the third quarter, and $506 million or 71 cents a share, during the fourth quarter of 2012.  The third-quarter results were lowered by a $235 million tax adjustment.  The year-over-year improvement mainly reflected a decline in the provision for credit losses, to $60 million during the fourth quarter, from $92 million the previous quarter and $252 million a year earlier.

BB&T's net interest income declined to $1.397 billion during the fourth quarter from $1.454 billion the previous quarter and $1.513 billion a year earlier.  The company's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to a tax-adjusted 3.56% during the fourth quarter, from 3.68% the previous quarter and 3.84% a year earlier.

While long-term interest rates rose considerably during 2013, in anticipation of the Federal Reserve's eventual tapering of its "QE3" purchases of long-term bonds, many banks are continuing to see margin pressure as certain loan types with rates indexed to short-term bench marks -- including home equity loans and equipment leases -- reprice lower, while most newly originated mortgage loans -- indexed to long-term rates --  are immediately sold to Fannie Mae ( FNMA) and Freddie Mac ( FMCC).

Noninterest income totaled $985 million during the fourth quarter, compared to $905 million the previous quarter and $1.020 billion a year earlier.  The sequential increase reflected "a $31 million net gain on the sale of a consumer lending subsidiary with approximately $500 million in loans, an $18 million increase in income related to assets for certain post-employment benefits that is offset in personnel expense, and a $16 million increase in insurance income," according to BB&T.

The year-over-year decline in noninterest income mainly resulted from a decline in mortgage banking income to $100 billion during the fourth quarter from $231 million during the fourth quarter of 2012.  This follows the industry trend, as rising long-term interest rates have curtailed the wave of mortage refinancing applications, while also reducing gain-on-sale margins.

BB&T's noninterest expense declined to $1.456 billion during the fourth quarter, from $1.471 billion the previous quarter and $1.488 billion a year earlier.

The bank's average loans held for investment, excluding loans acquired from failed banks with government loss-sharing agreements -- declined slightly during the fourth quarter but were up 2% year-over-year, to $112.6 billion.  Average commercial and industrial loans were roughly flat at $38.1 billion as of Dec. 31, while average commercial real estate loans grew 4% year-over-year to $11.5 billion.  Average sales finance loans -- that is, indirect vehicle loans made through dealers -- rose 3% sequentially and 20% year-over-year, to $9.3 billion in the fourth quarter.

The company's return on average assets for 2013 was 0.96%, declining from 1.14% the previous year, while its return on average tangible common equity (ROTCE) for 2013 was 13.61%, declining from 17.39% during 2012.  The lower ROTCE partially reflected a significant increase in the tangible common equity ratio to 7.3% as of Dec. 31, from 6.6% a year earlier. 

"Looking ahead to 2014, we are optimistic about a number of initiatives that will help drive performance," BB&T CEO Kelly King said in the company's earnings release. "We recently announced an agreement to acquire 21 retail branches in Texas that will accelerate the growth of our franchise in these fast growing markets. We also continue to expand our wealth, corporate banking, insurance and specialized lending businesses," he added.

Jefferies analyst Ken Usdin in a note to clients on Thursday called BB&T's top-line results "a bit soft."

"We peg operating EPS at $0.73 excluding the loan sale gain and merger charges. In our view, the quarter beat consensus of $0.72 but in a "low-quality" way. Lower-than-expected provision expense helped offset lower purchase accounting accretion and soft insurance revenues. Otherwise, expenses were well-controlled and capital accretion was robust," Usdin wrote.

The analyst rates BB&T a "hold," with a price target of $40.00.

BB&T's shares were slightly higher in premarket trading to $38.85.

The following chart shows the performance of BB&T's stock against the KBW Bank Index ( I:BKX) and the  S&P 500 since the end of 2011:

BBT Chart data by YCharts


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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.

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