Income Investor recommendation BB&T (NYSE:BBT), along with banking peers like Zions Bancorp (NASDAQ:ZION) and Fifth Third Bancorp (NASDAQ:FITB), reported relatively flat results for the first quarter. For the most part, it was business as usual in a tough banking environment.
For Q1, GAAP net income was down 2.3% versus last year. Operating earnings, which excludes merger and restructuring expenses, were up 3.4%. As with peers like PNC Financial (NYSE:PNC) and Bank of America (NYSE:BAC), growth in fee income, which isn't dependent on the slope of the yield curve, helped to offset sluggish net interest income growth. Fee income was boosted by insurance commissions, service charges on deposit accounts, trust revenues, and check card services, which helped offset weakness in mortgage banking. During the conference call, management noted they had reached their goal of 40% of sales from fee income, and hoped to get it up to 45%.
Net interest margin fell to 3.61% from 3.82% last year, partly due to a mix shift in low-cost deposits to higher-cost money markets and CDs, because of rising interest rates and the competitive environment for deposits. To combat this, BB&T is rationalizing its deposit pricing strategy and being less aggressive on CD pricing.
In terms of credit losses, there were no major flags. The company went to lengths to explain it has very little exposure to some of the problems that have blindsided some subprime and Alt-A lenders. For example, BB&T's subprime exposure is to auto loans. A couple of years ago, the industry experienced a severe shakeout and many marginal players exited or went under. As a result, subprime auto loan pricing wasn't irrational the way it was in residential lending. Furthermore, losses are correlated with used car pricing (due to high repossession rates) and unemployment -- both of which have remained stable.
Subprime residential loans made up only 0.4% of BB&T's portfolio, and Alt-A mortgages accounted for 3.9%. The average Alt-A loan was made at 67% loan to value and had an average 734 FICO score, indicating very strong credit quality. Although BB&T has a fair amount of exposure to residential builders as a lender, management noted that the company works with local builders, who tend to know their markets and not get caught holding speculative unsold homes. BB&T remarked that so far, it hasn't had to take charge-offs in this space.
In terms of what the future holds, BB&T is always scouring the M&A space. The company is looking at community banks, insurance agencies, and consumer finance, but so far the prices it's seeing are too high. Management also reiterated that it is open to doing a merger of equals.
For further Foolishness:
- BB&T Doesn't Sweat Stormy Environment
- Foolish Forecast: Will BB&T Bend or Buckle Up?
- A Closer Look at BB&T
- Fifth Third Hopes to Turn the Corner
Bank of America and BB&T are Motley Fool Income Investor recommendations. Try any one of our investing services free for 30 days.
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
