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BB&T Corp.’s (BBT - Analyst Report) second-quarter 2014 adjusted earnings per share of 71 cents lagged the Zacks Consensus Estimate of 75 cents. Further, this was below 77 cents earned in the year-ago quarter. The current quarter results included mortgage and tax-related reserve adjustments with an after-tax impact of $88 million or 12 cents per share, and merger-related and restructuring charges of $8 million or 1 cent per share.

Lower-than-expected results were mainly due to a decline in revenues as well as rise in non-interest expenses. Nevertheless, improvement in credit quality and capital ratios were the tailwinds. Profitability ratios however deteriorated.

BB&T’s net income available to common shareholders was $425 million, down from $547 million in the prior-year quarter.

Performance in Detail

Total revenue came in at $2.31 billion, down 7.5% year over year. However, it was in line with the Zacks Consensus Estimate.

Tax-equivalent net interest income decreased 5.1% year over year to $1.38 billion. The decline was due to a fall in interest income.

Moreover, net interest margin (NIM) fell 27 basis points (bps) year over year to 3.43%. The pressure on NIM persists primarily due to lower yield on total loan portfolio, partially offset by a rise in average earnings assets.

Non-interest income declined 10.8% year over year to $933 million. The decrease was mainly due to a fall in both mortgage-banking and other income, partially offset by rise in Bankcard fees and merchant discounts.

Non-interest expense rose 3.7% year over year to $1.55 billion. The rise was primarily prompted by an increase in loan-related expenses and outside IT services, which were however, partly offset by a decline in personal expenses, professional services and net merger-related and restructuring charges.

BB&T’s efficiency ratio in the reported quarter was 59.8%, up from 57.6% in the prior-year quarter. An increase in efficiency ratio indicates decline in profitability.

Average deposits inched down 0.3% year over year to $129.6 billion. However, average loans and leases held for investment were $117.1 billion, up 2.5% year over year.

Credit Quality

BB&T’s credit quality continued to show improvements. As of Jun 30, 2014, total non-performing assets (NPAs) declined 28.2% year over year to $916 million. As a percentage of total assets, NPAs came in at 0.49%, down 22 bps year over year.

Similarly, excluding covered loans and government guaranteed loans, net charge-offs were 0.40% of average loans and leases, down 35 bps from the year-ago quarter. Further, allowance for loan and lease losses was 1.27% of total loans and leases held for investment, down from 1.57% as of Jun 30, 2013.

Profitability and Capital Ratios

Profitability metrics deteriorated in the quarter. As of Jun 30, 2014, return on average assets was 1.04%, as against 1.27% at the prior-year quarter end. Moreover, return on average common equity decreased to 8.03% from 11.39% as of Jun 30, 2013.

BB&T's capital ratios were strong. As of Jun 30, 2014, Tier 1 risk-based capital ratio and tangible common equity ratio were 12.0% and 7.7%, respectively, compared with 11.1% and 6.8% as of Jun 30, 2013.

BB&T's estimated common equity Tier 1 ratio under Basel III was approximately 10.0% at Jun 30, 2014, based on management's interpretation of the final rules adopted in Jul 2, 2013 by the Federal Reserve Board, which established a new comprehensive capital framework for U.S. banking organizations.

Our Viewpoint

Sluggish economic recovery, a low interest rate scenario and various regulatory issues will continue to limit top-line growth. Moreover, expense management will likely be more challenging due to the company’s inorganic growth plans.

However, BB&T’s steady capital position and strong asset quality will expectedly bolster its financials in the quarters ahead.

Currently, BB&T carries a Zacks Rank #3 (Hold).

Other Regional Banks

Among other major regional banks, Comerica Incorporated (CMA - Analyst Report) posted second-quarter earnings per share of 80 cents, beating the Zacks Consensus Estimate by 5.3%.

Citigroup Inc. (C - Analyst Report) reported second-quarter adjusted earnings per share of $1.24, outpacing the Zacks Consensus Estimate of $1.08.

BankUnited, Inc. (BKU - Analyst Report) is scheduled to report on Jul 24.

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