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On July 17, 2009, BB&T Corporation (NYSE:BBT) reported its second quarter 2009 financial results. Operating earnings for the quarter (excluding $0.07 per diluted share of special assessment from the Federal Deposit Insurance Corporation or FDIC, $0.08 per diluted share accelerated amortization on the preferred stock repaid to the Treasury in connection with the TARP and $0.06 per diluted share gains on sales of securities and extinguishment of debt) came in at $0.29 per diluted share, five pennies ahead of our estimate and eight pennies ahead of consensus.

Though the quarter experienced higher loan losses and additional loan loss reserves, strong capital levels, increased production in mortgage banking operations, and strong growth in commercial loans as well as low-cost client deposits were impressive during the quarter.

GAAP net income in the quarter was $121 million or $0.20 per diluted share, compared to $428 million or $0.78 per diluted share in the prior-year quarter.

Tax-equivalent net interest income for the quarter was $1.2 billion, flat sequentially and up 7.1% year-over-year. Operating net interest margin was 3.56% for the current quarter, flat sequentially and down 9 basis points from the prior-year quarter. Core non-interest income (which excludes securities gains and losses) for the quarter increased 20.1% year-over-year to $993 million, mainly due to a 222.8% increase in mortgage-related revenues and 18.6% increase in insurance income.

Non-interest expense for the quarter increased 23.1% year-over-year to $222.0 million and included $103 million of additional FDIC insurance expense, foreclosed property-related expenses, legal fees and settlements totaling $56 million associated with the current credit environment. Excluding these items, non-interest expenses was essentially flat year over year.

Credit metrics deteriorated further during the quarter, with non-performing assets rising 57 bps sequentially to 3.29% of average loans and leases plus foreclosed property. Net charge-offs increased 23 bps sequentially to 1.58% of average loans and leases.

Profitability metrics also suffered during the quarter, with return-on-average assets and return-on-average equity down to 0.56% and 3.43% as compared to 0.86% and 8.29%, respectively, at the end of the prior quarter and 1.28% and 13.27%, respectively, at the end of the prior-year quarter.

Tier-1 leverage ratio was 8.5% at June 30, 2009, down from 9.4% during the prior quarter but up from 7.2% at June 30, 2008. In addition, BBT’s Tier-1 risk-based capital and total risk-based capital ratios were 10.6% and 15.2%, respectively, down from 12.1% and 17.1%, respectively, at March 31, 2009. However, BBT’s risk-based capital ratios are significantly higher than its peer average and remain well above regulatory standards for well-capitalized banks.

Stress tests results showed that BBT did not need any additional capital, and the company repaid TARP funds after a common stock offering and 68% reduction in dividend. Therefore, based on 2Q09 results, we are maintaining our Hold recommendation.

Source: BB&T Q2 Results Look Strong

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