BB&T Corp. reported earnings Thursday that met Wall Street expectations, as a focus on controlling expenses helped offset slowing loan growth and continued margin pressure.
The Winston-Salem, N.C., company's net income rose 67.7% from the fourth quarter but fell 2.3% from a year earlier, to $421 million. Its fourth quarter included a balance-sheet restructuring that cut into earnings.
Excluding $4 million of merger charges, BB&T's earnings per share of 78 cents met Wall Street estimates, according to Thomson Financial. The quarter also included a $4 million mortgage servicing rights hedge gain and $11 million of securities losses.
John A. Allison, BB&T's chairman and chief executive, said difficult operating conditions persist. "The next quarter or so may continue to be challenging," he said during a conference call. "But we are optimistic about the second half of 2007 and 2008, and I feel like we have got some nice momentum in place."
A large portion of that momentum may come from lower expenses at the $121.7 billion-asset BB&T, which has been cutting jobs in recent months. Noninterest expenses fell 17.2% from the fourth quarter and rose 7.8% from a year earlier, to $883 million. Personnel expenses fell 1.7% from the fourth quarter, to $524 million, aided by the elimination of 468 positions.
Brian J. Mauney, a Citigroup Inc. analyst, wrote in a note to clients issued Thursday that efforts to curb costs significantly exceeded his expectations, emerging as "the bright spot of the quarter."
But tighter margins took a toll on net interest income, which fell 1.2% from the fourth quarter and rose 5.4% from a year earlier, to $945 million. The margin shrank 9 basis points from the fourth quarter and 21 points from a year earlier, to 3.61%. As executives had warned during January's earnings call, a change in leveraged lease accounting contributed to the compression.
Balance-sheet growth yielded mixed results. Loans rose 2.1% from the fourth quarter and 11.9% from a year earlier, to $85.3 billion. Deposits fell 1.7% from the fourth quarter, though they increased 5.7% from a year earlier, to $79.8 billion.
Mr. Allison said loan growth is "healthy, but it is slowing" in areas such as commercial real estate. "We do expect the real estate markets to remain slow, probably for up to another year. But we don't expect there to be any shakeout in real estate."
Mr. Allison said BB&T had become less aggressive with prices on its certificates of deposit. Despite the strategic shift, he said, BB&T is still struggling with "the big challenge of transaction movement out of low-cost deposits to higher-cost deposits."
Noninterest income rose 8.3% from the fourth quarter and 7.2% from a year earlier, to $652 million, though BB&T reported lower insurance commissions and service charges on deposits.
Nonperforming assets rose 5.2% from the fourth quarter and 24% from a year earlier, to $367 million. The loan-loss provision fell 2.3% from the fourth quarter but rose 51.1% from a year earlier, to $71 million. Net chargeoffs fell 10.3% from the fourth quarter but rose 27.1% from a year earlier, to $61 million.
Mr. Allison called the level of nonperforming assets "great numbers by long-term standards." But he said BB&T expects lower recoveries to drive its provision expense higher this year. The CEO also discussed BB&T's exposure to nontraditional mortgages. He said its subprime business is "very small," with just $369 million of loans, or 0.4% of total loans, and that its alternative-A exposure is $3.3 billion, or 3.9% of total loans.