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BB&T Corporation’s (BBT) third quarter earnings of 23 cents per share were in line with the Zacks Consensus Estimate. However, this compares unfavorably with earnings of 65 cents in the year-ago quarter.

The year-over-year decrease in earnings was due primarily to a 94.8% increase in provision for credit losses and other costs related to the credit environment. However, strong growth in revenue, net interest margin and non-interest-bearing deposits were impressive during the quarter.

The quarter was also characterized by strong capital levels, increased production in mortgage banking operations and strong growth in commercial loans as well as low-cost client deposits.

The results were also positively impacted by the Colonial acquisition. On Aug. 14, BB&T assumed all of the deposits and certain assets of Colonial Bank (Colonial) after it was seized by regulators. This is the biggest acquisition in BB&T’s history, creating the nation's eighth-largest financial holding company by deposits. We believe that a successful integration of Colonial will further strengthen BB&T’s already diversified revenue base, strong capital structure, and impressive loan and deposit growth.

Net income available to common shareholders for the quarter was $152 million, compared to $358 million in the prior-year quarter.

Tax-equivalent net interest income for the quarter was $1.3 billion, up 14.2% year-over-year. Tax-equivalent net interest margin was 3.68% for the current quarter, up 12 basis points (bps) sequentially and 2 bps year-over-year. The improvement in the margin reflects the accretive impact of the Colonial acquisition and improved asset and liability pricing from BB&T's legacy balance sheet.

Non-interest income for the quarter increased 18.7% year-over-year to $940 million, reflecting strong performance from BB&T's mortgage banking and insurance operation. Other non-deposit fees and commissions also improved during the quarter.

Non-interest expense for the quarter increased 31.3% year-over-year to $1.3 billion and included $96 million of additional foreclosed property expenses, an additional $35 million in FDIC insurance expense and $17 million for increased pension costs. Excluding these items, non-interest expenses increased 2.7% year-over-year.

Credit metrics deteriorated further during the quarter, with non-performing assets rising 49 bps sequentially to 3.78% of average loans and leases plus foreclosed property. Net charge-offs increased 13 bps sequentially to 1.71% of average loans and leases.

Profitability metrics also suffered during the quarter, with return on average assets and return on average equity down to 0.40% and 3.90% compared to 1.05% and 10.86%, respectively, at the end of the prior-year quarter.

Tier 1 leverage ratio was 8.5% at Sep 30, 2009, up from 7.6% at Sept. 30, 2008. In addition, BB&T’s Tier 1 risk-based capital ratio was 11.1%, up from 9.4% in the prior-year quarter. The improvement in these capital levels reflects BB&T’s 38.5 million shares of common issuance on Aug 21 in connection with the Colonial Bank acquisition. The company’s risk-based and tangible capital ratios remain well above regulatory standards for well-capitalized banks.

Last week U.S. Bancorp (USB) signed a deal to acquire BB&T’s banking operations in Nevada. As per the agreement, U.S. Bank National Association, U.S. Bancorp’s lead bank, will purchase about $800 million in deposits and certain branches of BB&T’s Nevada banking operations.

Though the company is in a somewhat better position than many of its peers due to its diversified revenue base, strong capital structure, and impressive loan and deposit growth, continued deterioration in the housing markets will keep the credit-related costs high in the upcoming quarters. Therefore, we continue to maintain our Neutral recommendation on the shares of BB&T.

Source: BB&T Reports in Line Quarter, but YOY Decrease