BB&T's Balanced Attack

Southeastern-based bank and Income Investor selection AmSouth Bancorp (NYSE: ASO  ) released good quarterly numbers on Tuesday. Today, it looks like BB&T (NYSE: BBT  ) has one-upped AmSouth, with a first quarter that's just a bit stronger across the board.

By every basic metric, the bank's health looks solid. Based on operating earnings, return on equity was 15.6%, return on assets was 1.6%, and the efficiency ratio was 53.8%. All three of those metrics are healthy for a bank, and either flat or a slight improvement on last year's performance (except for the efficiency ratio, which crept up slightly). Most importantly, the company's net interest margin fell from last year's 3.95% to 3.82%, but the 3.82% is flat with last quarter. The company expects to see a slow increase in its net interest margin, ending the year in the 3.85% to 3.9% range. Overall, the trend on net interest margin looks to be turning slightly positive, which bodes well for BB&T.

Another bright spot is non-interest income, up 17.7% versus last year. The biggest driver here is the company's insurance business, which generates substantial commission revenue and continues to gain market share. Backing out acquisitions, the non-interest income growth was still a healthy 15.1%.

Looking on the balance sheet (end of period), total deposit growth came in at 13.1%, but non-interest-bearing deposit growth was a bit slower at 6.1%. This isn't a huge surprise, since interest rates are up, but the more non-interest-bearing deposit growth for BB&T, the better. The company's asset quality remains strong, since non-performing assets decreased from last year and stayed flat with last quarter at 0.27%.

If I wanted to quibble, I could express disappointment in the increase in the efficiency ratio, but that's largely due to increased hiring and some stock-based compensation expense hitting in this quarter -- and that will be smaller the rest of the year. The real challenge to BB&T's success is that things are also going relatively well for other banks, including the community banks that BB&T likes to focus on as acquisition candidates. On its conference call, the company announced that it expects to close its acquisition of Main Street Banks (Nasdaq: MSBK  ) in the second quarter, and its acquisition of First Citizens in the third quarter. But the company doesn't see a lot of other opportunities out there; community bank valuations are too high to make an acquisition work.

All things considered, I'm pretty happy with the company's reported quarter and the prospects for its next few quarters. I just wish the rest of the market wasn't so enthusiastic about the company's performance -- the stock is up more than 4% today -- but that's life. In truth, I think the shares are still reasonably valued. Today's rise in price has forced the company's dividend yield down to 3.6%, but hopefully investors will soon cool off a bit on BB&T and its performance.

For more Foolishness you can bank on:

AmSouth Bancorp is aMotley Fool Income Investorrecommendation.

NathanParmelee owns shares in BB&T, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.

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7/30/2009 11:36 AM
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